Society faces trade-offs between inflation and unemployment. Use a diagram to explain.

The trade-off between inflation and unemployment in an economy can be explained using the Phillips Curve. The Phillips Curve is a graphical representation that shows the inverse relationship between the rate of unemployment and the rate of inflation in an economy.

Here are the steps to explain this using a diagram:

1. Draw a downward sloping curve on a graph. The vertical axis (Y-axis) represents the inflation rate and the horizontal axis (X-axis) represents the unemployment rate.

2. The downward slope of the curve indicates that there is an inverse relationship between inflation and unemployment. This means that when unemployment is high, inflation is low and vice versa.

3. For example, during a recession, unemployment is high because many people are out of work. This leads to a decrease in demand for goods and services, which in turn leads to lower prices and therefore lower inflation.

4. On the other hand, during an economic boom, unemployment is low because many people are working and have more money to spend. This leads to an increase in demand for goods and services, which in turn leads to higher prices and therefore higher inflation.

5. However, this trade-off is only short-term. In the long run, according to the vertical long-run Phillips Curve, there is no trade-off between inflation and unemployment. This is because in the long run, inflation is determined by monetary policy, while unemployment is determined by the natural rate of unemployment, which is influenced by factors such as technology and labor market institutions.

6. This can be represented by a vertical line on the graph (the long-run Phillips Curve) at the natural rate of unemployment. This shows that in the long run, changes in the rate of inflation have no effect on the unemployment rate.

Remember, this is a simplified explanation and the actual relationship between inflation and unemployment can be influenced by a variety of factors.