When both inflation and unemployment rise, the inflation-unemployment cycle enters the Phillips phase.
What Happens When Inflation and Unemployment Are Positively Correlated?
- The decline in a currency's purchasing power over time is referred to as inflation. As a result, one unit of money has less purchasing power than it had before economic inflationary forces emerged. When there is a greater demand for labor than there are available positions, economists refer to this scenario as unemployment.
- When a central bank seeks to encourage growth by regulating the money supply, monetary policy is implemented. To encourage growth, interest rates are lowered and more money is printed and poured into the economy. When central banks try to stifle growth, rates rise.
- Tax and expenditure policies are referred to as a nation's fiscal policy. The promotion of economic growth occurs when governments relax their fiscal restrictions. When the reins are pulled tighter, growth is slowed.
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