Summary IB Econ RWE of Phillips curve - trade-off between unemployment and inflation

PC - Trade-off between unemployment and inflation - US

Short-run situation

SRPC → there is a negative relationship between the rate of inflation and the rate of unemployment.

1.​ High unemployment and low inflation → Covid pandemic

This relationship is mainly observed in the time period from April to September 2020.




There was a severe downturn in AD due to the pandemic. This fluctuation in the business cycle led to
lower real output as the economy moved away from the full employment level of output, causing an
increase in demand-deficient or cyclical unemployment.

2.​ Low unemployment and high inflation → Post-pandemic

This relationship is observed during 2021. As the economy recovered from the pandemic,
employment figures went up but so did inflation.

In 2021, unemployment decreased steadily and reached 3.9% in December, but during the same
period the rate of inflation rose significantly, and reached 7.0% in December. The increase in AD due
to the economic rebound after the pandemic increased the level of economic output, bringing cyclical
unemployment down, but also increasing the average price level in the economy.