Demand pull-inflation: when the aggregate demand is more than the aggregate supply in an

economy due to increase of demand, firms tend to hire more people which eventually increases
the output and increases employment
Cost push-inflation: when the aggregate supply due to external factors will result in increase in
price level. This also affects employment as well because there is a decrease in GDP, the
demand for goods and services also decreases

p2
Price

p1

p0

y0 y1 y2

Real GDP
The Phillips curve shows the direct relationship between unemployment and inflation rates on
common goods and services. The curve essentially suggests that there is an inverse
relationship when one increases the other decrease which would suggest a stable economy.
inflation

unemployment
In the 1970s the Phillips curve shifted. In the late 1960s, the government tried to pull
down unemployment rates in the US economy and had estimated a certain inflation
cost. However, the actual inflation rate was much higher than estimated indicating a
shift in the Phillips curve from P1 to P2. This also means that the inflation rate and the
unemployment rate were a lot higher than first expected.
inflation

p2

p1

unemployment