Discuss the view that there will always be a trade-off between the unemployment rate and the

inflation rate.

Labor force is the people at working age, willing and able to work. Unemployment is people at
working age, willing and able to work, but without job. Unemployment rate is the percentage of
the total labor force that is unemployed. Natural unemployment occurs when the economy is
producing at its potential or full employment level of output, and it includes structural, frictional
and seasonal unemployment. Inflation is a sustained increase in average price level. Inflation rate
refers to an overall increase in the consumer Price Index , which is a weighted average of prices
for different goods. Trade-off implies the exchange of one thing to get the another.

There is a trade-off when the AD curve shift. Short run Phillips curve occurs when prices of all
factors of production are fixed, and it shows the trade relationship between unemployment and
inflation rate in the short-run. When the government spending increases, as the government
spending is one of the component of AD, then the AD 1 curve shifts to the right to the AD 2, and
the price level increases from PL1 to PL2, the real output increases from Y1 to Y2. Because the real
output increases, the firms need more labor to produce products, then there are less
unemployed people and the unemployment rate decreases from Un a to Unb. Also because the
price level increases, the inflation rate increases from I1 to I2. As shown in the diagram between
inflation rate and unemployment rate, the initial point a move to the point b. At this situation, it
has a trade-off.

However, there is no trade-off when the SRAS curve shifts or LRAS occurs. When the minimum
wage increases, the cost of production increases, then the firm will reduce the output supplied at
any given price level in order to maintain certain amount of profits. Hence, the SRAS 1 shifts to the
left to the SRAS2, the inflation rate increases from PL1 to PL2, and the real output decreases from
Y1 to Y2. Because the real output decreases, the firms need less labor to produce products, then
there are more unemployed people and the unemployment rate increases from Un a to Unb. And
also because the price level increases, the inflation rate increases from I 1 to I2. Thus, in the
diagram between inflation rate and unemployment rate, SRPC 1 shifts to the SRPC2, and the point
a becomes the point b. Point b has higher unemployment rate and inflation rate than point a. At
this situation, it has no trade-off.
Long-run Phillips curve means that in the long run, all wages and prices in an economy are
flexible, and unemployment and output will return to full-employment. When the government
spending increases, as the government spending is one of the component of AD, then the AD 1
curve shifts to the right to the AD 2, the equilibrium changes from A to B, and the price level
increases from PLA to PLB, the output increases from YP to YB. In the diagram between inflation
rate and unemployment rate, the initial point a moves to the point b. Inflation rate increases
from Ia to Ib, unemployment decreases from Un a to Unb. When price level increases, prices of all
kinds of factors of production increase which means the cost of production increases, thus the
SRAS decreases, shifts from SRAS1 to SRAS2. At this time, the equilibrium changes from B to C, the
price level increases to the PLC, but the YB moves back to the YP. Therefore, in the diagram
between inflation rate and unemployment rate, SRPC1 shits to the SRPC2, the point b changes to
the point c. Inflation rate increases from I b to Ic, unemployment move back to Una. Point c has the
same employment rate as point a, but a higher inflation rate. This situation refers that LRPC is
vertical at the natural rates of unemployment and so there is no trade-off.