The Relationship between Inflation and the Unemployment Rate Inflation is when there is a constant rise in the general level of prices, within the economy. This can sometimes be seen as devaluing the worth of the currency. Although inflation is constant, it is however very irregular and does not rise to an alarming rate very often.
There are numerous causes of inflation, however the highly popular reason maybe be caused by the demand-pull inflation, this is caused by the continued rise in aggregate demand (total amount of spending in the economy) exceeds the aggregate supply at current prices.
Some firms will deal with this situation by raising their prices and by increasing their output. Depending upon how much their costs have been raised as result of increasing their output, will also determine how much their prices will be raised.
In addition, cost-push is another cause of inflation; this is when the costs of production are constantly increasing, despite the level of aggregate demand.
This will result in firms raising their prises, or by passing their costs onto the consumer and also by reducing their production.
By restricting demand in order to control inflation, has costs this is by either control of the money supply or by cuts in the government spending However, if wages are increasing rapidly and the government attempts to bring demand into the economy, unemployment may be the result of their actions. "Unemployment is when those who are of working age are willing and able to work for a rate of pay, however are unable to find such means of employment". (Sloman and Sutcliffe) This is because employers will be unable to pay their staff because they cannot raise their sale prices, due to low demand. The wages would be high, as well as sale prices, although...