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Policy and the financial sector · 9 of 10

Do macro objectives conflict?

Weigh the conflicts between growth, inflation and the balance of payments

Key terms
Phillips curve
The Phillips curve shows a trade-off between the unemployment rate and the inflation rate, so that when one is higher the other is lower.
Stagflation
Stagflation is an unhealthy combination of high unemployment and high inflation at the same time.

Phillips found in British data that lower unemployment came with faster wage growth

Keynesian theory implied that inflationary pressure is low in a recession and rises as output reaches or passes potential GDP. In 1958 A. W. Phillips, at the London School of Economics, analysed British data from 1861 to 1957 and found that lower unemployment went with faster growth in money wages; economists soon restated it as a trade-off between unemployment and price inflation. During the 1960s they treated it as a policy menu.