Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

9.8 INFLATION AND UNEMPLOYMENT 
 
Inflation is rise in the price of goods over time. Pure inflation 
is the special case in which all price of goods and factor input are 
rising at the same percentage rate. 
Inflation is defined as persistent and appreciable increase in 
the prices of goods and services. Harry Johnson defines inflation 
as, ―sustained increase in price‖. While Crowther define inflation as, 
―state in which value of money is falling i.e. prices are rising.‖ 
Monetarists regard inflation as ‗purely a monetary 
phenomenon‘. Milton Friedman observes, ‗Inflation is always and 
everywhere a monetary phenomenon.‖ 

---

Golden Weiser state that, ―inflation occurs when volume of 
money actively bidding for goods and services increases faster 
than available supply of goods.‖ 
In other words, inflation is a case where too much money 
chasing too few goods. 
Inflation can be 
stated as ―difference between growth of 
nominal money supply and growth of real money demand. 
Inflation Rate = Growth of Nominal Money Supply 
– Growth of Real 
Money Demand When growth of real money demand is zero 
inflation rate equals rate of nominal money growth. 
This also given by quantity theory of money which 
established direct and proportionate relationship between money 
and price level, holding velocity of circulation of money and volume 
of transactions constant.
In equation form it can be written as, 
 
 
 
9.8.1 Trade Off Between Inflation and Unemployment : 
 
In 1958, Prof. A.W. Phillips of London School of Economics 
demonstrated that there was a strong statistical relationship 
between annual inflation rate and annual unemployment rate in 
U.K. Similar relationship were found in other countries and this 
relationship come to be known as Phillips Curve. 
The Phillips curve shows that a higher inflation rate 
accompanied by a lower unemployment rate and vice-versa. It 
suggests that one can trade off more inflation for less 
unemployment and vice-versa. 
The Phillips curve seemed the answer to the problem of choosing 
macroeconomic policies in the 1960s. Phillips curve showed the 
menu of choices available, government had to decide how much 
extra inflation they were prepared to tolerate in exchange of lower 
unemployment.