The relationship between inflation and the unemployment rate is commonly described as an inverse one, known as the Phillips Curve. When inflation rises, unemployment tends to fall, and vice versa. In terms of policy objectives, the importance of maintaining these factors can differ significantly between expansionary and contractionary policies.
Expansionary Policy Objectives: In times of economic downturns or recession, expansionary policies are aimed at stimulating growth and increasing employment. Protecting and maintaining low unemployment is crucial during these times. Lower unemployment enhances consumer spending, which can drive demand and boost inflation to a healthier level. Therefore, for expansionary policies, prioritizing low unemployment while managing inflation expectations is key.
Contractionary Policy Objectives: On the flip side, contractionary policies are often employed to curb rising inflation rates, especially after periods of rapid economic growth. Here, the focus shifts toward controlling inflation, even if it might lead to a temporary rise in unemployment. The goal is to ensure that inflation does not spiral out of control, which can lead to long-term economic stability issues. In this context, it becomes more important to prioritize inflation control over maintaining low unemployment rates.
In summary, during expansionary periods, protecting low unemployment takes precedence, while in contractionary scenarios, controlling inflation becomes the primary objective. Both factors are crucial, but the emphasis shifts depending on the economic landscape.