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The Short-Run Trade-Off between Inflation and Unemployment

Unemployment and Inflation . The natural rate of unemployment depends on various features of the labour market.Examples include minimum wage laws, the market power of unions, the role of efficiency wages, and the effectiveness of job search.The inflation rate depends primarily on growth in the qua

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The Short-Run Trade-Off between Inflation and Unemployment

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    1. The Short-Run Trade-Off between Inflation and Unemployment

    2. Unemployment and Inflation The natural rate of unemployment depends on various features of the labour market. Examples include minimum wage laws, the market power of unions, the role of efficiency wages, and the effectiveness of job search. The inflation rate depends primarily on growth in the quantity of money, controlled by the central bank.

    3. Unemployment and Inflation Society faces a short-run trade-off between unemployment and inflation. If policymakers expand aggregate demand, they can lower unemployment, but only at the cost of higher inflation. If they contract aggregate demand, they can lower inflation, but at the cost of temporarily higher unemployment.

    4. THE PHILLIPS CURVE The Phillips curve illustrates the short-run relationship between inflation and unemployment.

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