The Economics of European Integration - Essay Example

There is an inverse relationship between inflation and unemployment and this relationship is represented by the Philips curve. The Phillips curve shows this inverse relationship and concludes that a decrease in unemployment in an economy will correlate with increased inflation rates.  According to this relationship when there are more people employed in an economy the output increases, so do the wages from the labor force. The increase in wages means that people have more money to spend which increases their demand for goods and services and ultimately the prices of these goods and services will increase to meet the increased supply of money in the economy. From the Philips curve therefore it is apparent that inflation and unemployment share an inverse relationship where inflation rises with the reduction of unemployment and vice versa (Gordon 2011).

                    From the diagram, when the unemployment rate is 4% the inflation rate is 7% and when the unemployment rate is 6% the inflation rate is 3%. The diagram clearly shows that when the rate of unemployment is higher (6%) the rate of inflation is lower (3%) than when the unemployment rate is low (4%) which results in a higher inflation rate (7%).