Principle 10 Of Mankiw And Taylor's Ten Principles Of Economics

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Register to read the introduction… The increase in production will therefore mean more hiring is needed, which increases the demand for workers resulting to a decrease in unemployment. In addition in the short run an increase in inflation will reduce unemployment, resulting to a trade-off between inflation and unemployment. In addition Pettinger (2011) says “If an economy experienced inflation, then the Central Bank raises interest rates. Higher interest rates will reduce consumer spending and investment leading to lower aggregate demand. This fall in aggregate demand will lead to lower inflation. However, if there is a decline in Real GDP, firms will employ fewer workers leading to a rise in unemployment.” Furthermore Hoover (2008) brought forward that “when unemployment was high, wages increased slowly and when unemployment was low, wages rose rapidly.” In the short-run Phillips Curve the level of inflation depends on the given level of unemployment thus the curve slopes downwards. The main reason that the curve is downward sloping is that there is ‘money illusion’; Cunningham (2012) demonstrated that “in short run wages are not renegotiated which means that there are some wage contracts which are not affected by the increase in the money supply and growth.” This therefore brings forward that when there is an increase in the supply of money, it will result in an increase in the inflation rate …show more content…
The relationship between the inflation rate and the unemployment rate looked to have broken down. It was therefore possible to have a number of inflation rates for any given unemployment rate. Mankiw and Taylor (2011) and Begg, Fischer and Dornbusch (2008) have both shown that the Breakdown of Phillips curve was caused by several reasons such as high boost in the price of oil on world markets because of the OPEC (Organization of the Petroleum Exporting Countries) supply cuts, another reason was the “Expansionary or accommodative monetary policy pursued by central banks.” During this period the United Kingdom and many other countries began to experience growing unemployment and higher inflation rates as well, this came to be known as ‘Stagflation”. (See diagram …show more content…
Economics. 9th ed. Berkshire: McGraw-Hill Education. p508-512.

* Cunningham, S.R (2012). A World of Persistent Inflation. [ONLINE] Available at: [Accessed 04 March 2013].

* Hall, D. (2012) Inflation and Unemployment [Lecture Notes]

* Hoover, K.D (2008) Phillips Curve: Library of Economics and Liberty. [ONLINE] Available at: [Accessed 04 March 2013].

* Mankiw, N.G (2011). Principles of Economics. 6th ed. Mason, OH, USA: South-Western College.

* Mankiw, N.G and Taylor M.P (2011). Economics. 2nd ed. Cheriton House, North way, Andover, Hampshire, United Kingdom : Brendan George.

* Minerd, Scott [ONLINE] Available at:;;.aspx. [Accessed 4 March

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