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1 Introductory concepts 2  Market mechanism  3 Elasticities  4 Market structures 5  Market failures  6  Macro economic activity/eco growth  7 Inflation 8  Employment & unemployment  9  External Stability  10  Income distribution 11.Factors affecting economy  12  Fiscal/Budgetary policy  13  Monetary Policy   14 Aggregate Supply Policies  15 The Policy Mix

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The Phillips curve

The Phillips curve depicts the relatively short run relationship or trade-off that sometimes exists between inflation and unemployment.  When inflation increases in response to pressures from a growing economy, it is usually associated with lower unemployment.  Accordingly, government efforts to reduce cyclical unemployment by stimulating AD typically results in inflationary pressure.  Similarly, lower inflation that accompanies lower growth will usually be associated with higher unemployment as the low growth rates lead to job losses.  Efforts by governments to lower inflation via demand management tools (i.e. by reducing demand) typically jeopardise the achievement of full employment.  Note that the Phillips curve cannot account for the existence of stagflation, where low economic growth and high unemployment exist alongside high rates of inflation.  Similarly, it cannot account for more ideal economic conditions where high economic growth and low unemployment occur alongside low rates of inflation.  Continual efforts by governments to exploit the ‘trade off’ between inflation and unemployment result in a vertical long run Phillips curve, but this is beyond the scope of most secondary economics courses.

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