Measure and explain economic growth, unemployment and inflation, draw the diagrams for their causes, weigh their costs and evaluate the conflicts between macroeconomic objectives.
Each is in the Economics glossary, with every other term in the subject.
The reference year against which values in other years are compared in an index, given the value 100.
The representative collection of goods and services bought by a typical household, in fixed quantities or weights, whose cost is tracked to calculate a consumer price index.
The amount by which a government’s total spending exceeds its total revenue over a period, usually a year; a flow that adds to government debt.
An index measuring the change in the cost of a fixed, weighted basket of goods and services bought by a typical household, compared with a base year set at 100.
A measure of inflation that excludes the most volatile prices, usually food and energy, to show the underlying trend in the general price level.
Inflation caused by increases in costs of production, such as wages, energy, raw materials or imported inputs, which shift the short-run aggregate supply curve to the left.
An assessment by a rating agency of how likely a borrower, such as a government, is to repay its debts in full and on time; a lower rating raises borrowing costs.
Unemployment caused by a fall in aggregate demand in the downturn of the business cycle, when firms need fewer workers to produce a lower level of output.
Explain the difference between short-term and long-term economic growth, using PPC and AD/AS diagrams, and calculate the rate of growth from data.
Evaluate the consequences of economic growth for living standards, the environment and the distribution of income.
Calculate the unemployment rate, explain why unemployment is hard to measure, and explain the causes and costs of each type of unemployment with diagrams.
Calculate the inflation rate from consumer price index data, and explain the limitations of the CPI.
Explain demand-pull and cost-push inflation and the causes of deflation with AD/AS diagrams, and distinguish between deflation and disinflation.
Evaluate the costs of high inflation, of deflation and of unemployment, and their relative importance.
Calculate a weighted price index from a set of data (HL).
Explain how budget deficits add to government debt, and the costs of high government debt (HL).
Evaluate the possible conflicts between macroeconomic objectives, including the short-run and long-run Phillips curves (HL).
Governments judge the performance of an economy against a small set of macroeconomic objectives: steady economic growth, low unemployment, low and stable inflation, and, increasingly, a level of government debt that can be sustained. These objectives matter because they shape economic well-being: whether people have jobs, whether incomes rise, and whether the money people earn and save keeps its value.
The objectives are linked, and they often pull against each other. Policies that create jobs quickly can push up prices; policies that bring inflation down can cost jobs; fast growth can damage the environment or widen inequality. Choosing between them is a question of
363 exam-style questions on this subtopic, written in the style of the IB papers. The first has its markscheme open. Counted on
Inflation in an economy has risen to 7%, well above the central bank’s target of 2%.
Explain how a central bank can use contractionary monetary policy to reduce inflation.
10 marks
Responses may include:
an accurate AD/AS diagram showing AD shifting left
higher interest rates raising the cost of borrowing
lower consumption and investment, reducing AD
a stronger currency reducing net exports
Level 4 (9–10 marks): a clear explanation with a fully labelled diagram.
Using real-world examples, evaluate the effectiveness of monetary policy in reducing inflation.
15 marks
Evaluation may consider:
time lags between a rate change and its effect
whether inflation is demand-pull or cost-push
the effect on growth and unemployment
the credibility and independence of the central bank
Level 5 (13–15 marks): balanced evaluation supported by relevant real-world examples.
One of 66 short multiple-choice questions on 3.3. Pick an answer to see why it's right or wrong.
How can a long period of cyclical unemployment reduce an economy's potential output?
The official deck for this part of the syllabus.
State the three main macroeconomic objectives studied at SL.
State the macroeconomic objective that HL adds to growth, low unemployment and low and stable inflation.
With a free account, Augment remembers where you stopped and what you have practiced.
The payments of interest (and repayments of principal) that a government must make on its outstanding debt in a period.
A sustained fall in the general (average) level of prices in an economy over time, so that the inflation rate is negative.
Inflation caused by increases in aggregate demand, when total spending grows faster than the economy’s capacity to produce, especially near full employment.
A fall in the rate of inflation, so that the general price level continues to rise but more slowly than before.
An increase in the real output of goods and services in an economy over time, measured as the percentage change in real GDP (or real GDP per capita), usually over a year.
Short-term unemployment of people who are between jobs or entering the labour market and are searching for suitable work.
The total amount owed by a government as a result of past borrowing, equal to accumulated past budget deficits minus surpluses; a stock, often expressed as a percentage of GDP.
Unemployment not shown in official figures, such as discouraged workers who have stopped looking for work or people placed on sickness benefits or early retirement who would work if jobs were available.
Extremely high and accelerating inflation, often defined as more than 50% a month, in which money rapidly loses almost all its value.
A sustained increase in the general (average) level of prices in an economy over time, usually measured as the percentage change in a consumer price index.
All people of working age who are either employed or unemployed, that is, without a job but willing, able and actively looking for work.
The labour force (the employed plus the unemployed) as a percentage of the working-age population.
The costs to firms of changing their prices, such as reprinting price lists and updating systems, which rise when inflation is high.
The rate of unemployment when the economy is at full employment output: the sum of structural, frictional and seasonal unemployment, with no cyclical unemployment.
The unit for the arithmetic difference between two percentages: a rate that rises from 4% to 6% has risen by 2 percentage points, which is a 50% increase.
A curve showing the relationship between the unemployment rate and the inflation rate: the short-run curve slopes downward (a trade-off); the long-run curve is vertical at the natural rate of unemployment.
The quantity of goods and services that a given amount of money can buy; inflation reduces it and deflation increases it.
Unemployment that occurs because demand for labour in some industries, such as tourism, agriculture and construction, changes with the seasons of the year.
The failure of a government to make payments of interest or principal on its debt when they are due.
The combination of high or rising inflation with stagnant or falling real output and rising unemployment, typically caused by an adverse supply shock.
Long-term unemployment caused by a mismatch between workers’ skills or location and the jobs available, after changes in the structure of the economy, or by labour market rigidities.
A level of government debt that can continue to be serviced without ever-larger tax rises or spending cuts, a sharp rise in borrowing costs, or default.
The situation in which people are employed but work fewer hours than they want, or in jobs that do not use their skills and qualifications.
The situation in which people of working age who are willing and able to work, and actively looking for work, do not have a job.
The number of unemployed people expressed as a percentage of the labour force (the employed plus the unemployed).
A price index in which the price change of each item or category is multiplied by a weight reflecting its share of household spending, so items with larger spending shares affect the index more.
Economic growth means that an economy produces more goods and services over time. Because more output means more income, growth is the main way in which living standards rise over the long term. A country whose output grows by 3% a year doubles its output in about 23 years; at 7% a year it doubles in about ten.
Growth is measured with real figures, not nominal ones. Nominal gross domestic product can rise simply because prices have risen, even if the economy produces nothing extra. Real GDP removes the effect of price changes, so a rise in real GDP shows that the quantity of goods and services has actually increased.
The growth rate is the percentage change in real GDP between two periods:
The same formula gives the growth rate of real GDP per capita, which is the better guide to changes in average living standards, because it allows for population growth. An economy whose real GDP grows by 2% while its population grows by 3% has falling output per person.
In the short term, an economy can grow by using resources it already has but leaves idle: unemployed workers, factories working below capacity, machines standing unused. On a production possibilities curve (PPC) this is a movement from a point inside the curve towards the curve itself. This is called actual growth, because actual output rises while the economy’s capacity stays the same.
In the AD/AS model, short-term growth comes from a rise in aggregate demand (AD) when the economy has spare capacity. Higher consumption, investment, government spending or net exports shift AD to the right. Firms respond to the extra spending by hiring idle workers and using idle capital, so real GDP rises along the upward-sloping short-run aggregate supply (SRAS) curve.
In the left-hand diagram, the economy starts at Y₁, below full employment output Yf. The rise in AD from AD₁ to AD₂ increases real GDP to Y₂ and the average price level from P₁ to P₂. This kind of growth has a limit, because once the economy reaches its potential output, further increases in AD mainly raise prices.
Long-term growth comes from an increase in the economy’s capacity to produce. On a PPC this is an outward shift of the curve, called growth in production possibilities. It happens when the quantity or quality of the factors of production rises, or when they are used more efficiently: more workers, more capital, better education and health, new technology, and better institutions.
In the AD/AS model, long-term growth is a rightward shift of the long-run aggregate supply (LRAS) curve, from Yf₁ to Yf₂ in the right-hand diagram. Full employment output itself rises, so the economy can produce more without generating inflation. If AD does not change, the larger supply even lowers the price level; in practice AD usually grows as well, and the price level is stable or rising slowly.
The same analysis applies to the Keynesian AS curve, whose vertical section moves to the right when capacity grows. Both views agree that sustained growth in living standards depends on growth in capacity: AD can raise output towards the existing limit, but only higher productivity and more resources move the limit outward.
Short-term (actual) growth | Long-term growth (growth in production possibilities) | |
|---|---|---|
What changes | Use of existing resources | Quantity or quality of resources, technology, efficiency |
PPC | Movement from inside the curve towards it | Outward shift of the curve |
AD/AS | AD shifts right while there is spare capacity | LRAS (or the vertical part of the Keynesian AS curve) shifts right |
Typical causes | Lower interest rates, higher confidence, government spending, stronger export demand | Investment in capital and human capital, research and new technology, better institutions |
Limit | Stops at full employment output | No fixed limit, but slow to achieve |
Growth is pursued because it raises incomes, but its consequences are not all positive. Their size and direction depend on what kind of growth takes place, who receives the extra income, and how production affects the environment. A full judgment weighs the benefits for living standards against the costs for the environment and for the distribution of income.
Higher real income per person lets households consume more goods and services, and governments collect more tax revenue at the same tax rates, which pays for health care, education and infrastructure. Over decades this is the largest single source of improvement in material living standards: fewer people in absolute poverty, longer lives and more years of schooling.
The link is not automatic. If the extra output goes mainly into military spending, or into exports whose earnings leave the country, living standards may change little. Growth measured by GDP also leaves out unpaid work, leisure and the quality of goods, so a rise in GDP can overstate the rise in well-being. Long working hours, stress and congestion can make people feel worse off even as measured output grows.
Producing more usually means using more energy and raw materials and creating more waste, so growth can cause pollution, deforestation and climate change. These are negative externality costs that GDP does not subtract, and they threaten sustainability: the ability of future generations to meet their own needs.
China shows both sides. Between 2000 and 2023 its real GDP rose to about 6.2 times its 2000 level, and its emissions of carbon dioxide rose to about 3.6 times theirs. Emissions grew more slowly than output, because each unit of output used less energy over time, but total emissions still rose steeply, because output grew so fast.
Sources: World Bank, World Development Indicators: GDP (constant 2015 US$) and CO₂ emissions excluding LULUCF from EDGAR (2026).
Growth can also help the environment. Richer economies can afford cleaner technology, stricter regulation and investment in renewable energy, and a shift from manufacturing towards services can reduce emissions per unit of output. Whether growth harms the environment therefore depends on its composition and on policy, not on growth alone.
Growth raises average income, but it need not raise everyone’s income by the same proportion. When growth is concentrated in high-skill industries, cities or capital-intensive sectors, the gains go mostly to those who own capital or have scarce skills, and inequality widens. In China, the Gini coefficient rose from 32.2 in 1990 to 43.7 in 2010 during its fastest growth, before falling to 36.0 by 2022.
Sources: World Bank, Poverty and Inequality Platform, via World Development Indicators (2026).
Growth can also reduce poverty and inequality when it creates many jobs for low-skilled workers, or when the government uses higher tax revenue for transfer payments, education and health care. The effect on equity is therefore a matter of policy as well as of growth: the same growth rate can narrow or widen the gap between rich and poor.
Consequence | Possible benefits | Possible costs | What the outcome depends on |
|---|---|---|---|
Living standards | Higher real income per person; more tax revenue for public services; less absolute poverty | Gains may not reach most households; GDP ignores leisure, unpaid work and stress | Population growth, how the extra output is used |
Environment | Funds cleaner technology and environmental protection | More pollution, resource depletion, carbon emissions | Type of growth, energy sources, regulation |
Income distribution | New jobs and higher wages can lift the poorest | Gains concentrated among the highly skilled and owners of capital | Sectors that grow, tax and transfer policy, access to education |
Unemployment means that people who want to work cannot find a job. It is a waste of a scarce factor of production, because output that could have been produced is lost for ever, and it causes hardship for the people affected. Low unemployment is therefore one of the central objectives of macroeconomic policy.
The definition is narrower than “people without a job”. Students, retired people, people caring full time for children or relatives, and people who are not looking for work are not counted as unemployed; they are outside the labour force. The labour force is the sum of the employed and the unemployed.
Unemployment is measured as a share of the labour force, not of the whole population:
A related measure is the labour force participation rate, the labour force as a percentage of the working-age population. It shows how many people of working age take part in the labour market at all, and it matters when interpreting the unemployment rate: if discouraged job seekers give up looking, the unemployment rate falls even though no one has found a job.
Most countries measure unemployment with a labour force survey, which asks a sample of households whether each adult worked in the past week and, if not, whether they looked for work. Some also count people who claim unemployment benefits. Both methods leave gaps, so the official rate can understate or overstate the true degree of unused labour.
Hidden unemployment. People who would like a job but have stopped looking, because they believe none is available, are not counted as unemployed. These discouraged workers make the official rate look lower than the true amount of unused labour, especially in long recessions. Hidden unemployment also includes people moved onto sickness or disability benefits or into early retirement who would work if jobs were available.
Underemployment. A person who works a few hours a week but wants full-time work counts as employed, as does a graduate working in a job that needs no qualifications. Underemployment means that labour is used, but less than it could be.
The informal economy. In many low- and middle-income countries a large share of people work in the informal economy: street trading, casual farm work, domestic work. Some of the officially unemployed work informally, while many people counted as employed earn very little and have no security.
Averages hide differences. A national rate conceals much higher unemployment in some regions, age groups and ethnic groups. In Spain in 2013 total unemployment was 26.1%, but unemployment among people aged 15–24 was 55.4%.
Government schemes. People on training schemes or job-support schemes are usually counted as employed. During the COVID-19 pandemic, workers on the UK’s furlough scheme kept their jobs on paper and were counted as employed, even though many did no work for months.
Sources: ILO modelled estimates, via World Bank, World Development Indicators (2026).
Unemployment has different causes, and each cause needs a different policy. Economists group it into four types: cyclical, structural, frictional and seasonal. The first is caused by a lack of total spending; the other three exist even when the economy is at full employment.
YouTubeWhen AD falls, for example because consumer or business confidence weakens, firms sell less and cut production. Since labour is a derived demand, they need fewer workers, so they stop hiring and lay workers off. The economy ends up in a deflationary gap (also called a recessionary gap): equilibrium real GDP is below full employment output.
The diagram shows AD meeting SRAS at Ye, to the left of the LRAS curve at Yf. The gap between Ye and Yf measures the output lost, and the workers who would have produced it are cyclically unemployed. Cyclical unemployment rises across most industries and regions at once, which is how it can be told apart from structural unemployment. In the Great Depression of the early 1930s, cyclical unemployment rose in almost every industrialised economy at the same time.
Keynesian economists argue that a deflationary gap can last for a long time because wages and prices are sticky downwards, so they support demand-side policies to raise AD. Monetarist/new classical economists expect wages and prices to fall, shifting SRAS to the right and returning the economy to full employment on its own, so they see less need for intervention.
Economies are always changing. Industries decline because of new technology, foreign competition or changing tastes, and others grow. Workers who lose their jobs in a declining industry often lack the skills the growing industries need, or live in the wrong place, so they stay unemployed for a long time even when there are vacancies elsewhere.
The diagram shows the labour market for coal miners. When demand for coal falls, the demand for miners falls from DL₁ to DL₂: the wage falls from W₁ to W₂ and employment from Q₁ to Q₂. The closure of most of the UK’s coal mines in the 1980s and 1990s left whole mining towns with high unemployment for many years, because the new jobs in services were in other regions and needed other skills. In the 2020s, the rapid spread of generative artificial intelligence has raised similar fears for some office jobs, although how many jobs it will replace, rather than change, is still uncertain.
Labour market rigidities are a second cause of structural unemployment. A minimum wage set above the equilibrium wage, strong employment protection that makes firms reluctant to hire, or generous benefits that reduce the incentive to search can all keep some workers out of jobs.
In the minimum wage diagram, the equilibrium wage is We and employment is Qe. At the legal minimum Wmin, more people want to work (Qs) but firms want to hire fewer (Qd), so the excess supply of labour Qs − Qd is unemployment. How large this effect is in practice is disputed: if the minimum wage is close to the equilibrium wage, or if employers have power to set wages, the job losses can be small or even zero.
Finding the right job takes time, and some frictional unemployment is a sign of a working labour market, because it means people search for jobs that match their skills. It is made worse by imperfect information: workers do not know about every vacancy, and firms do not know about every suitable worker. Job centres, online job platforms and better careers advice shorten the search.
In Greece, for example, many hotel, restaurant and transport jobs on the islands exist only in the summer tourist season, so employment rises in summer and falls in winter. Official statistics are often “seasonally adjusted” to remove these regular swings, so that underlying changes in unemployment can be seen.
Even when the economy is at full employment output, some people are unemployed. Frictional, seasonal and structural unemployment do not depend on the level of AD, so they remain when there is no cyclical unemployment. Their total is the natural rate of unemployment.
“Full employment” therefore does not mean zero unemployment. It means that the only unemployment is the kind that would exist even with enough total spending. Policies that raise AD cannot lower the natural rate for long; supply-side policies that improve skills, information and labour market flexibility can.
Unemployment imposes costs on the people who are unemployed, on society and on the economy as a whole. These costs grow the longer unemployment lasts, which is why long-term and structural unemployment are a particular concern.
Who bears the cost | Costs of unemployment |
|---|---|
The unemployed and their families (personal costs) | Loss of income and a lower standard of living; debt; loss of skills and work habits the longer they are out of work (making it harder to find a job); stress, ill health, loss of self-esteem; family breakdown |
Society (social costs) | Higher crime and social unrest in areas of high unemployment; more homelessness and poverty; wider inequality; pressure on health services; young people who never gain work experience |
The economy (economic costs) | Lost output: real GDP below potential, an opportunity cost that can never be recovered; lower tax revenue and higher spending on unemployment benefits, so a larger budget deficit; lower consumption by the unemployed, reducing AD further; loss of human capital, which can reduce potential output in the long run |
Some costs are hard to see in statistics. The loss of skills during long spells of unemployment can turn cyclical unemployment into structural unemployment: workers who have been out of work for years find it harder to be hired even after the economy recovers. This effect means that a deep recession can lower an economy’s potential output, not only its actual output.
Most people notice inflation as rising prices in shops. For economists, inflation is a rise in the general level of prices, not in the price of one good: if the price of coffee rises while the price of phones falls, there is no inflation unless prices on average rise. Most central banks aim for low and stable inflation, often around 2% a year.
When the price level rises, each unit of money buys fewer goods and services, so inflation reduces the purchasing power of money. A household whose income rises by 3% while prices rise by 5% can buy less than before: its real income has fallen.
Three related terms describe other kinds of change in the price level. Deflation is a sustained fall in the general price level, so the inflation rate is negative. Disinflation is a fall in the rate of inflation while it stays positive: prices still rise, but more slowly. Hyperinflation is extremely high inflation, often defined as more than 50% a month, in which money quickly loses almost all its value.
The difference between disinflation and deflation matters, because the two have opposite effects on the price level. If inflation falls from 10% to 4%, prices are still rising, only more slowly. The UK’s inflation rate fell from 11.1% in October 2022 to 4.0% in December 2023: a period of disinflation, in which the price level rose throughout.
Sources: Office for National Statistics, CPI annual rate, series D7G7 (2026).
Inflation is measured with a consumer price index (CPI), which tracks the cost of a fixed basket of goods and services bought by a typical household. Statistical offices first find out, through a household spending survey, what households buy and how much of each. Every month, staff record the prices of hundreds of items in shops and online across the country. The cost of the basket is then compared with its cost in a base year.
In the base year the index equals 100. An index of 108 a year later means that the basket costs 8% more. The index for any year is:
The inflation rate between two years is the percentage change in the index:
The basket is weighted by the quantities households buy. A 10% rise in the price of bread matters more than a 10% rise in the price of salt, because households buy far more bread. Valuing the same quantities at each year’s prices gives each good its correct importance automatically.
The table gives a simplified basket for a typical household, with the quantity of each item bought each year and its price in three years (hypothetical data).
Item | Quantity bought | Price 2024 ($) | Price 2025 ($) | Price 2026 ($) |
|---|---|---|---|---|
Food (kg) | 50 | 4.00 | 4.40 | 4.60 |
Bus journeys | 20 | 10.00 | 10.50 | 11.00 |
Clothing (items) | 10 | 30.00 | 30.00 | 31.50 |
Statistical offices also publish core inflation, which leaves out the most volatile prices, usually food and energy. Core inflation shows the underlying trend, which helps central banks avoid reacting to short-lived jumps in fuel or food prices. Headline CPI inflation, which includes everything, is what households actually experience.
The CPI is the most widely used measure of inflation, but it is an average built from a sample, and it can misstate the change in the cost of living for many households.
Different households, different baskets. The basket reflects average spending. Low-income households spend a larger share of their income on food and energy, older people more on health care, renters more on housing. When food and energy prices rise fastest, as in 2022, inflation for low-income households is higher than the CPI shows.
Changes in quality. If the price of a phone stays the same but the phone is much better, the true price per unit of quality has fallen. Statistical offices try to adjust for quality, but imperfectly, so the CPI may overstate inflation.
New products and changing tastes. New goods enter the basket only when it is revised, often once a year, so their early price falls are missed. Spending patterns also change between revisions.
Substitution. When one good becomes more expensive, households switch to cheaper alternatives. A fixed basket assumes they keep buying the same quantities, so it overstates the rise in their cost of living.
Where people shop. Price collection may not keep up with shifts to online shopping, discount stores or informal markets.
Owner-occupied housing. Many CPIs leave out the costs of owning a home, such as mortgage interest payments, which are a large part of many households’ spending.
International comparisons. Countries build their baskets and treat housing and quality differently, so their inflation rates are not perfectly comparable.
Statistical offices usually build the CPI from price indices for groups of goods, each with a weight equal to its share of household spending. A weighted price index multiplies each group’s price index by its weight and adds the results. If the weights are given as percentages that sum to 100, divide the sum by 100; if they are given as decimals that sum to 1, no division is needed.
The table gives the weights in a country’s CPI (share of household spending, %) and the price index of each category in 2025, with 2024 = 100 (hypothetical data).
Category | Weight (%) | Price index 2025 (2024 = 100) |
|---|---|---|
Food | 30 | 108 |
Housing and energy | 40 | 105 |
Transport | 20 | 96 |
Other goods and services | 10 | 102 |
Inflation has two main causes, which can be shown on the AD/AS diagram. Demand-pull inflation starts on the demand side, when spending grows faster than the economy can produce. Cost-push inflation starts on the supply side, when the costs of production rise. In practice both often happen at once, and they can feed each other.
AD can rise because of higher consumer or business confidence, lower interest rates, tax cuts, higher government spending, a rise in exports or a fast increase in the money supply. When the economy has plenty of spare capacity, firms meet extra demand mainly by producing more. As the economy approaches full employment, firms find it harder to hire workers and buy materials, costs rise, and they raise prices.
In the diagram, the economy begins at full employment output Yf with price level P₁. The increase in AD from AD₁ to AD₂ raises the price level to P₂ and real GDP to Y₂, beyond potential output: an inflationary gap. Firms produce beyond normal capacity by using overtime and running machines harder, which raises costs. In the monetarist/new classical view, rising wages then shift SRAS to the left until output returns to Yf at an even higher price level, so the only lasting effect of the extra demand is inflation.
Demand-pull inflation is often linked with fast growth in the money supply. Monetarists argue that inflation is ultimately caused by too much money chasing too few goods, so it can only be stopped by limiting monetary growth. Zimbabwe’s hyperinflation of 2007–08 began when the government financed its spending by printing money while output, especially farm output, was falling.
At its peak in mid-November 2008, Zimbabwe’s annual inflation rate was estimated at about 89.7 sextillion per cent (8.97 × 10²²%), and the largest note issued was for 100 trillion Zimbabwe dollars. Zimbabweans increasingly used foreign currencies instead, and in April 2009 the government stopped printing the Zimbabwe dollar.
Sources: Wikipedia, “Hyperinflation in Zimbabwe” (accessed 2026).
When firms’ costs rise across the economy, they pass part of the higher costs on as higher prices. Typical causes are a rise in the world price of oil or gas, higher prices of imported food and materials, a depreciation of the currency that makes imports dearer, higher indirect taxes, and wage increases greater than increases in productivity. A sudden rise in costs from outside the economy is called a supply shock.
In the diagram, SRAS shifts left from SRAS₁ to SRAS₂. The price level rises from P₁ to P₂, and real GDP falls from Y₁ to Y₂. Cost-push inflation is especially damaging because prices rise while output falls and unemployment rises. This combination is called stagflation.
The UK in 2022 is a clear case. Gas and electricity prices rose sharply after Russia’s invasion of Ukraine, and CPI inflation reached 11.1% in October 2022, the highest rate in the official series that begins in 1997. In that month alone, household gas prices rose by 36.9% and electricity prices by 16.9%, and food prices were 16.2% higher than a year earlier. Higher energy costs raised firms’ costs throughout the economy, so the effect spread to the prices of other goods and services.
Sources: Office for National Statistics, Consumer price inflation, UK: October 2022 (2022).
Cost-push inflation can turn into a wage–price spiral. When prices rise, workers ask for higher wages to protect their real incomes; higher wages raise firms’ costs, so SRAS shifts left again, and prices rise further. Whether this happens depends on how much bargaining power workers have and on whether people expect inflation to stay high.
Demand-pull inflation | Cost-push inflation | |
|---|---|---|
Starting point | Aggregate demand rises | Costs of production rise |
Curve that shifts | AD shifts right | SRAS shifts left |
Effect on real GDP | Rises (in the short run) | Falls |
Effect on unemployment | Falls (in the short run) | Rises |
Typical causes | Confidence, lower interest rates, tax cuts, government spending, export booms, money supply growth | Oil and energy prices, import prices, currency depreciation, indirect taxes, wages rising faster than productivity |
Example | Zimbabwe 2007–08 (money printing) | UK 2022 (energy prices) |
Low and stable inflation does little harm, and many economists think a small positive rate is better than zero, because it gives central banks room to cut real interest rates and avoids the risk of deflation. High or unpredictable inflation, by contrast, has many costs.
Uncertainty. When inflation is high and variable, firms cannot predict their future costs and revenues, so they are reluctant to sign long-term contracts or invest. Lower investment reduces future growth.
Redistribution of income and wealth. Inflation creates winners and losers. People on fixed incomes, such as some pensioners, and workers whose wages are not raised in line with prices lose purchasing power. Borrowers gain, because the real value of what they owe falls, while lenders lose, unless interest rates rise to compensate. Governments with large debts gain in the same way. Low-income households often lose most, because they hold savings in cash and spend more of their income on food and energy.
Effects on saving. If the inflation rate is higher than the interest rate on savings, the real interest rate is negative and savings lose value. This discourages saving, which reduces the funds available for investment.
Loss of export competitiveness. If a country’s inflation rate is higher than its trading partners’, its exports become relatively more expensive and imports relatively cheaper. Export sales fall and imports rise, which reduces international competitiveness, worsens the current account and can cost jobs, unless the currency depreciates to offset the difference.
Effects on economic growth. Through uncertainty, lower saving and lower investment, high inflation tends to slow long-term growth. Resources are also diverted into protecting wealth from inflation instead of into productive activity.
Inefficient resource allocation. Prices act as signals. When all prices are rising fast, firms and consumers find it hard to tell whether a price rise reflects a real change in relative scarcity or only general inflation, so resources are misallocated. Firms also face menu costs, the costs of repeatedly changing prices, and households spend time and effort managing their money.
Inflation also has a “fiscal drag” effect when tax thresholds are not raised with prices: as nominal incomes rise, more people move into higher tax bands, so the real burden of tax rises without any change in tax rates.
Deflation, a sustained fall in the general price level, can come from either side of the AD/AS model. The cause matters, because deflation caused by falling demand is usually harmful while deflation caused by rising supply can accompany healthy growth.
In the left-hand diagram, AD falls from AD₁ to AD₂, perhaps because of falling confidence, high debts, a fall in asset prices or a recession abroad. The price level falls from P₁ to P₂ and real GDP from Y₁ to Y₂, so unemployment rises. This “bad” deflation is associated with recessions.
In the right-hand diagram, SRAS shifts right from SRAS₁ to SRAS₂, perhaps because of cheaper energy, new technology or faster productivity growth (an increase in LRAS has the same effect on the price level). The price level falls while real GDP rises. This “good” or benign deflation took place in several countries in the late nineteenth century, when new technology and transport lowered costs. Prices of many electronic goods also fall each year for the same reason, although this is a fall in relative prices, not deflation of the general price level.
China has been close to deflation in recent years. Its CPI inflation was only 0.2% in 2023 and in 2024, and 0.0% in 2025, as a long slump in the property market weakened household confidence and spending. This is the demand-side pattern: weak AD holding prices down while firms struggle to sell their output.
Sources: IMF, World Economic Outlook database, via DataMapper (2026).
Deflation caused by falling demand is widely seen as more dangerous than moderate inflation, because it can reinforce itself in a deflationary spiral.
Deferred consumption. If consumers expect prices to keep falling, they postpone buying durable goods such as cars and appliances, waiting for lower prices. AD falls further, so prices fall further: a downward spiral.
High cyclical unemployment and bankruptcies. Firms selling less at lower prices cut output and jobs. Their revenues fall while many of their costs, such as rent and debt repayments, are fixed in money terms, so more of them go bankrupt.
A rising real value of debt. When prices and incomes fall, the money value of a debt stays the same, so it becomes harder to repay. Households and firms with debts cut spending to repay them, reducing AD further. Governments with large debts face the same problem.
Redistribution. Deflation transfers purchasing power from borrowers to lenders and savers, the opposite of inflation.
Uncertainty and inefficient resource allocation. As with inflation, unpredictable price changes make planning harder and blur price signals.
Policy ineffectiveness. A central bank fights falling demand by cutting interest rates, but nominal interest rates cannot easily fall much below zero. With prices falling, even a zero nominal rate means a positive real interest rate, which discourages borrowing and spending, so monetary policy loses much of its power.
Governments often have to choose which problem to tackle first, because policies that reduce inflation can raise unemployment and the reverse. Which is worse has no single answer; it depends on how high each one is, how long it lasts and who bears its costs. The question is partly normative, because it involves value judgments about whose losses matter most.
The output lost to unemployment is gone for ever: workers’ time that is not used cannot be stored. Its costs also fall heavily on a minority of people, who lose most of their income, while the rest of the population is largely unaffected, which raises concerns about equity. Long-term unemployment destroys skills and can lower potential output for years. Keynesian economists, in particular, tend to give priority to reducing unemployment.
Inflation affects everyone who uses money. Once high inflation becomes expected, it is built into wage claims and prices and is hard to stop, and the policies needed to bring it down, such as high interest rates, can cause a recession and the very unemployment they were meant to avoid. High inflation also discourages saving and investment and so lowers long-term growth. Monetarist/new classical economists tend to see price stability as the foundation for growth and employment, which is one reason many central banks have a single inflation target.
Moderate inflation of 3–4% probably costs less than unemployment of 10%, while hyperinflation can destroy an economy’s money and cause even greater losses of output and jobs. The judgment also depends on the cause: cost-push inflation from a temporary energy shock may fade without action, while inflation driven by expectations or money creation will not. Many governments today aim for low, stable inflation because they see it as a condition for sustained low unemployment.
Factor | Makes unemployment the greater concern | Makes inflation the greater concern |
|---|---|---|
Size | Unemployment is high or rising fast | Inflation is high, rising, or close to hyperinflation |
Duration | Long-term unemployment causing loss of skills | Inflation expectations rising and becoming entrenched |
Who bears the cost | Concentrated on the unemployed, often low-income groups | Spread across all users of money, especially savers and people on fixed incomes |
Economic view | Keynesian: sticky wages, persistent deflationary gaps | Monetarist/new classical: inflation harms growth; unemployment returns to the natural rate |
Governments spend on public services, transfer payments and investment, and they finance this mainly through taxes. When spending is greater than revenue in a year, the government has a budget deficit and must borrow the difference, usually by selling government bonds. The total of everything it has borrowed and not yet repaid is the government debt.
When revenue is greater than spending, the government has a budget surplus and can use it to repay part of what it owes.
The difference between a flow and a stock is the key to this topic. A budget deficit is like the amount a household overspends this year; the debt is the total it owes on all its loans. Each year’s deficit adds to the stock of debt, and a budget surplus reduces it. A government can cut its deficit sharply and still see its debt rise, as long as it still has a deficit.
A debt of $500 billion would be enormous for a small economy and modest for a large one. Debt is therefore measured relative to the size of the economy, as a percentage of nominal GDP, which reflects the government’s ability to raise the revenue needed to service it:
The ratio rises when the debt grows faster than nominal GDP and falls when nominal GDP grows faster. So a government can reduce its debt ratio with a small deficit if the economy grows quickly, and see its ratio rise even with a balanced budget if nominal GDP falls in a recession.
There is no single safe level of debt. Japan’s debt was 204.8% of GDP in 2025, but for most of the period from the late 1990s to 2024 interest rates in Japan were close to zero, most of the debt was held by Japanese savers and institutions, and it was in Japan’s own currency, so servicing it was manageable. Other governments have run into crisis with far lower ratios.
Debt is more likely to be sustainable when the interest rate the government pays is lower than the growth rate of nominal GDP, when the debt is in the government’s own currency, when much of it is owed to domestic lenders, and when investors trust the government’s policies. It is less sustainable when interest rates rise, when much of the debt is in foreign currency, and when growth is weak.
How the borrowed money is used also matters. Borrowing to finance investment in infrastructure, education or health that raises potential output can pay for itself over time through higher tax revenue, while borrowing to finance current spending adds to the debt without increasing the economy’s capacity to repay it.
Debt servicing costs. The government must pay interest on its debt. These debt servicing costs have an opportunity cost: money spent on interest cannot be spent on schools, hospitals or infrastructure. If interest rates rise, or the debt grows, servicing costs can take a large share of government revenue.
Credit ratings. Agencies such as Moody’s, S&P and Fitch give each government a credit rating, an assessment of the risk that it will not repay. A downgrade raises the interest rate investors demand, which makes borrowing more expensive and can push debt onto an unsustainable path.
Higher future taxes or lower future spending. Debt must eventually be serviced, so high debt today means higher taxes or lower government spending in the future. This can reduce growth and shift the burden to future generations, a question of intergenerational equity.
Less room to respond to shocks. A government with high debt may be unable to borrow more in a recession, so it cannot use expansionary fiscal policy when it is most needed, and may even have to cut spending during a downturn.
Risk of default. If investors lose confidence, the government may be unable to borrow to repay maturing debt. A sovereign default cuts the country off from international borrowing, damages its banks (which often hold government bonds), and usually brings a currency collapse and a deep recession.
Ghana shows how fast this can happen. After downgrades by several credit rating agencies made it impossible to borrow on international markets, Ghana suspended payments on most of its external debt, including its Eurobonds and commercial loans, in December 2022. Inflation had reached about 50% in November 2022. Days earlier it had reached a staff-level agreement with the IMF for about $3 billion of support, conditional on restructuring its debt.
Sources: Al Jazeera, “Ghana suspends payment of most external debts” (20 December 2022); IMF, World Economic Outlook database (2026).
The objectives cannot always be achieved together. A policy that moves the economy towards one objective may move it away from another, so governments face trade-offs. Which conflict matters most depends on the state of the economy, on the cause of the problem and on the time frame.
When the government or central bank raises AD to reduce cyclical unemployment, firms produce more and hire more workers. As the economy approaches full employment, labour and other resources become scarce, so wages and costs rise and the price level rises faster. Lower unemployment is bought at the cost of higher inflation.
The conflict also works the other way. To bring inflation down, central banks raise interest rates, which reduces AD. Spending and output fall and unemployment rises, at least for a time. In both directions, demand-side policy moves unemployment and inflation in opposite directions.
The conflict is weaker when there is a large deflationary gap: with many idle resources, AD can rise with little effect on prices. It is also weaker for supply-side causes. Supply-side policies that raise productivity shift LRAS to the right and can lower both inflation and unemployment over time, while a supply shock such as a rise in oil prices raises both at once.
In 1958 the economist A. W. Phillips published a study of the UK from 1861 to 1957 showing that years of low unemployment tended to be years of rapid wage inflation, and the reverse. Others soon found the same pattern for price inflation in other countries. The Phillips curve shows this inverse relationship between the unemployment rate and the inflation rate.
The AD/AS model explains why the short-run Phillips curve slopes downward. When AD rises along an upward-sloping SRAS curve, real GDP rises, so firms employ more workers and unemployment falls; at the same time the price level rises faster. A movement from A to B in the AD/AS diagram corresponds to a movement up and to the left along the SRPC.
In the 1960s, governments believed they could use this trade-off as a menu of choices: accept slightly higher inflation in return for lower unemployment. US data from that decade fit the downward-sloping curve closely: as unemployment fell from 6.7% in 1961 to 3.5% in 1969, inflation rose from about 1% to 5.5%.
In the 1970s the relationship broke down. After the oil price shocks of 1973–74 and 1979, the United States and many other countries experienced stagflation: rising inflation and rising unemployment at the same time. In 1975 US unemployment was 8.5% and inflation 9.1%, both far higher than the 1960s curve would predict. A single stable curve could not explain this.
Milton Friedman and Edmund Phelps had argued in the late 1960s that the trade-off exists only in the short run, because it depends on people being surprised by inflation. Their explanation, which became the monetarist/new classical view, uses expectations of inflation.
Starting point A. The economy is at the natural rate of unemployment (NRU) with inflation π₁, which everyone expects.
Movement from A to B. The government raises AD. Prices rise faster than expected, so real wages fall; firms’ revenues rise, and they hire more workers. Unemployment falls below the NRU to U₁ and inflation rises to π₂, a movement along SRPC₁.
Adjustment. Workers realise that their real wages have fallen and demand higher money wages, now expecting inflation of π₂. Firms’ costs rise, SRAS shifts left, and employment falls back.
Movement from B to C. Unemployment returns to the NRU, but inflation stays at π₂, because it is now expected. The SRPC has shifted up to SRPC₂.
Joining the long-run positions A and C gives a vertical long-run Phillips curve (LRPC) at the natural rate. In the long run, there is no trade-off: demand-side policy can hold unemployment below the NRU only by causing ever-faster, accelerating inflation. The only way to reduce unemployment permanently is to lower the natural rate itself, with supply-side policies.
The vertical LRPC matches the vertical LRAS curve of the monetarist/new classical model: both say that in the long run, output and unemployment depend on the supply side, and AD affects only the price level. A permanent rise in LRAS lowers the NRU and shifts the LRPC to the left.
The argument also works in reverse. To reduce inflation from π₂, a central bank must reduce AD, which moves the economy down SRPC₂ to unemployment above the NRU. Inflation falls, expectations adjust downward, and the SRPC shifts back down. The temporary rise in unemployment is the cost of disinflation, which is why bringing inflation down is often painful.
YouTubeThe theory explains the 1970s experience and the later policy of targeting inflation, and it is supported by the observation that the same unemployment rate has gone with very different inflation rates in different decades. It shows why governments cannot permanently buy low unemployment with inflation.
Its limitations are also clear. The NRU cannot be observed directly and may change over time, so policymakers do not know exactly where the LRPC is. Keynesian economists argue that in a deep recession unemployment can stay above the natural rate for years, and that long unemployment can raise the natural rate itself, so the long run may be far away.
Recent experience adds further doubts. In the 2010s inflation in many rich countries changed little even as unemployment fell to very low levels, suggesting the short-run curve had become very flat when inflation expectations were firmly anchored. In 2021–23 inflation rose sharply mainly because of supply shocks, which shift the SRPC rather than move the economy along it.
Growth driven by rising AD tends to cause inflation once the economy approaches its potential output. If AD grows faster than LRAS for several years, the economy moves into an inflationary gap and inflation rises, as in the demand-pull diagram. Central banks then raise interest rates, slowing growth. In the short run, fast growth and low inflation conflict.
The conflict disappears when growth comes from the supply side. If LRAS shifts right as fast as AD, the economy grows without inflation; if LRAS grows faster, prices may even fall, as in the “good” deflation diagram. Over the long run, sustained growth in productivity is compatible with low inflation, which is why supply-side growth is seen as the most desirable kind.
Growth based on fossil fuels, intensive farming or the extraction of minerals and forests uses up resources and produces pollution and greenhouse gases. These costs fall on third parties and future generations, so they conflict with sustainability. A government trying to raise growth quickly may relax environmental rules or subsidise polluting industries.
The conflict can be reduced. Investment in renewable energy, carbon pricing and regulation can shift growth towards cleaner production, and new technology can reduce emissions per unit of output. Whether it can be removed entirely is debated: some economists argue that rich countries can “decouple” growth from emissions, while others argue that the total use of resources must eventually stop growing.
Growth often benefits some groups much more than others. Market-led growth tends to reward people who own capital or have scarce skills, and the regions and sectors that grow fastest, so inequality can widen as average incomes rise, as it did in China between 1990 and 2010. Policies to raise growth, such as cutting top tax rates to encourage enterprise, can also widen inequality.
Policies to improve equity, such as more progressive taxes and higher transfer payments, may reduce incentives to work and invest and so slow growth, although the evidence on how large this effect is remains mixed. Equity-enhancing policies can also support growth: spending on education and health for low-income families builds human capital and raises potential output. Whether the conflict is serious depends on the policies chosen.
Key concept | How it applies to the macroeconomic objectives |
|---|---|
Scarcity and choice | Governments cannot achieve every objective at once with limited policy tools, so they must choose priorities. |
Efficiency | Unemployment wastes labour; high inflation distorts price signals; both mean resources are not used as well as they could be. |
Equity | Unemployment and inflation fall unevenly on different groups; growth can widen or narrow inequality. |
Economic well-being | Jobs, rising real incomes and stable prices are basic to financial security. |
Sustainability | Growth can deplete resources and harm the environment; high government debt can shift burdens to future generations. |
Change | The objectives are measured as changes over time: growth rates, inflation rates, changes in unemployment. |
Intervention | Monetary, fiscal and supply-side policies are interventions aimed at the objectives, and they can conflict with each other. |
Interdependence | Oil price shocks, recessions abroad and global interest rates affect each country’s growth, inflation and unemployment. |
Argentina has struggled with high inflation for decades, and by 2023 it had become extreme. The IMF’s figures show average consumer price inflation rising from 48.4% in 2021 to 72.4% in 2022 and 133.5% in 2023, while real GDP shrank by 1.9% in 2023. The government had been running large budget deficits for years, financed in large part by the central bank creating money, and an official exchange rate held far above the peso’s market value had created a large parallel market for US dollars.
The costs of this inflation were the ones economic theory predicts. People saved in dollars rather than pesos, because the peso lost value so quickly, which reduced saving in the domestic banking system and left little finance for investment. Firms could not plan, and workers whose wages lagged behind prices saw their real incomes fall. Poverty, as measured by INDEC, the national statistics office, stood at 41.7% of people in the second half of 2023.
In December 2023 the new government of Javier Milei introduced “shock therapy”. It more than halved the official value of the peso against the dollar, to about 800 pesos per dollar, cut government spending sharply, including tens of thousands of public sector jobs, and stopped financing the government by creating money. General government net lending moved from a deficit of 5.3% of GDP in 2023 to a surplus of 0.5% in 2024, the first general government surplus since 2008.
In the short run, the devaluation pushed up import prices, adding a burst of cost-push inflation: monthly inflation was 25.5% in December 2023, and the average for 2024 reached 219.9%. Then the contraction of AD and the end of money financing brought monthly inflation down quickly, to about 2–3% a month by early 2025, and the annual average fell to 41.9% in 2025. This was disinflation, not deflation: prices kept rising, but much more slowly.
The conflicts between objectives were severe. The cuts in spending and the fall in real wages reduced AD, so real GDP fell by a further 1.4% in 2024 and unemployment rose from 6.1% in 2023 to 7.2% in 2024. Poverty jumped to 52.9% in the first half of 2024. As inflation fell and real incomes began to recover, the economy grew by 4.5% in 2025, and poverty fell to 38.1% in the second half of 2024 and 31.6% in the first half of 2025.
Indicator | 2023 | 2024 | 2025 |
|---|---|---|---|
CPI inflation, annual average (%) | 133.5 | 219.9 | 41.9 |
Real GDP growth (%) | −1.9 | −1.4 | 4.5 |
Unemployment rate (%) | 6.1 | 7.2 | 7.4 |
General government net lending (% of GDP) | −5.3 | 0.5 | −0.2 |
Poverty rate, people (%), INDEC | 41.7 (H2) | 52.9 (H1); 38.1 (H2) | 31.6 (H1) |
Argentina’s experience shows several points of theory at once. It illustrates the costs of high inflation (uncertainty, the flight from saving in domestic money, the redistribution against wage earners and the poor), the short-run conflict between reducing inflation and maintaining growth and employment, and the role of expectations: monthly inflation fell quickly once the government stopped financing its deficits by creating money and people began to expect lower inflation. It also fits the monetarist view that persistent inflation is linked to money creation used to finance deficits.
The case has limits as evidence. Several things changed at once, so it is hard to separate the effects of the fiscal cuts, the devaluation and the change in expectations. Inflation of around 40% in 2025 was still far above the levels of most countries, and whether the gains last depends on the government keeping its budget in balance, rebuilding foreign currency reserves and avoiding a new currency crisis. The rise in poverty in 2024 also shows that the costs of disinflation fell heavily on low-income households, which raises questions of equity as well as efficiency.
Sources: IMF, World Economic Outlook database (PCPIPCH, NGDP_RPCH, LUR, GGXCNL_NGDP), via DataMapper (2026); INDEC poverty figures as reported by Infobae (25 September 2025) and Wikipedia, “Presidency of Javier Milei” (accessed 2026).
Macroeconomic objectives appear in every paper. Paper 1 asks for explanations with AD/AS diagrams in part (a) and evaluation of costs, consequences or conflicts in part (b). Paper 2 sets the calculations (growth, unemployment and inflation rates) and definitions, and diagram questions on the causes of unemployment and inflation. At HL, Paper 3 sets weighted price index and debt-ratio calculations and asks for policy recommendations to deal with inflation, unemployment or high debt.
Part (b) usually widens the theory of part (a) into an evaluation of policy or of priorities between objectives, and it requires real-world examples developed in context.
A Paper 2 part (g) question on this content might be: “Using information from the text/data and your knowledge of economics, evaluate the government’s decision to cut spending to reduce inflation.” A good answer uses the data on inflation, unemployment and growth from the text, draws an AD/AS diagram with AD shifting left, explains the costs of both inflation and unemployment, and weighs the short-run costs against the long-run benefits before reaching a judgment.
Economic growth is the percentage increase in real GDP. Short-term growth uses idle resources (AD rising; movement towards the PPC); long-term growth increases capacity (LRAS shifting right; outward PPC shift).
Growth raises living standards but can harm the environment and widen inequality; the outcome depends on the type of growth and on policy.
The unemployment rate is the unemployed as a percentage of the labour force. Hidden unemployment, underemployment and the informal economy make it hard to measure.
Cyclical unemployment comes from too little AD (a deflationary gap); structural, frictional and seasonal unemployment make up the natural rate of unemployment.
Inflation is measured by the percentage change in a weighted CPI. It is caused by rising AD (demand-pull) or rising costs (cost-push), and high inflation creates uncertainty, redistribution and lost competitiveness.
Deflation is a falling price level, disinflation a falling inflation rate. Deflation from falling AD can trap an economy in a spiral of postponed spending, rising real debt and unemployment.
HL: deficits (a flow) add to government debt (a stock); high debt raises servicing costs and can lead to downgrades and default. In the long run the Phillips curve is vertical at the NRU, so there is no lasting trade-off between unemployment and inflation.
The objectives can conflict: low unemployment and low inflation, growth and low inflation, growth and sustainability, growth and equity.
I can distinguish short-term from long-term growth using a PPC and AD/AS diagrams, and calculate a growth rate from real GDP data.
I can evaluate the consequences of growth for living standards, the environment and income distribution.
I can calculate the unemployment rate and explain why the official rate may understate unused labour.
I can explain cyclical, structural, frictional and seasonal unemployment with the right diagrams, and define the natural rate.
I can calculate a CPI and an inflation rate from basket data and explain the limitations of the CPI.
I can draw and explain demand-pull and cost-push inflation and the two types of deflation, and tell deflation from disinflation.
I can evaluate the costs of inflation, deflation and unemployment and judge their relative importance.
I can calculate a weighted price index and a debt-to-GDP ratio, and explain the costs of high government debt (HL).
I can draw the short-run and long-run Phillips curves and evaluate the trade-off between unemployment and inflation (HL).
I can evaluate conflicts between growth, low inflation, sustainability and equity with real examples.
Governments often aim to increase the output of goods and services in their economies.
Using a production possibilities curve (PPC), distinguish between actual growth and growth in production possibilities.
10 marks
Using real-world examples, discuss the view that economic growth always conflicts with environmental sustainability.
15 marks
During a recession, many workers and machines in an economy may be left idle.
Using a production possibilities curve (PPC), explain why an economy with unemployed resources can increase its output without incurring an opportunity cost.
10 marks
Using real-world examples, discuss the view that high unemployment is a greater problem for an economy than high inflation.
15 marks