Explain why a trade-off between price stability and low unemployment might occur

AQA A-Level Economics Paper 2 June 2018

Extract E (lines 16–17) states ‘However, some argue that trying to maintain stable prices and low unemployment could create trade-offs.’

With the help of a diagram, explain why a trade-off between price stability and low unemployment might occur.

1. Inflation is when there is a rise in average price level.
2. Unemployment refers to the people who are willing and able to work but cannot find a job.

1. A fall in unemployment means that more people are working, and earning an income.
2. As disposable incomes increase, consumers are able to increase their spending.
3. Consumer spending (C) is a component of aggregate demand (AD).
4. As aggregate demand increases, the price level increases from p1 to p2 as shown on the diagram below.
5. This happens because there is more demand chasing the same number of goods and services, and as many firms in the economy experience excess demand, they face pressure to increase prices.
6. It is also likely that increases in aggregate demand might cause a multiplier effect as business confidence increases and investment increases.
7. As aggregate demand increases more, inflation increases more.

A-Level Economics Tutoring

I offer one-to-one and small group A-Level Economics tutoring for students across the UK and internationally. With 87+ five-star Google reviews and tutoring experience since 2017, I specialise in helping students understand difficult concepts and improve their exam technique.