Concept

Trying to balance low unemployment and low inflation is like trying to ride a unicycle on a tightrope—it's tricky! If policymakers mess with aggregate demand, things can go south quickly.

• Increase Aggregate Demand: More jobs but risk higher inflation.
• Decrease Aggregate Demand: Lower inflation but risk more unemployment.

🎈 Real-World Example: Think of it as a birthday balloon. If you blow too much air into it (increasing demand), it might pop (inflation). But if you let too much air out (decreasing demand), it might sag (unemployment).

The Phillips Curve

illustrates this relationship. But the recent global financial crisis showed it's not a fixed rule. Even with low unemployment in the USA, inflation didn't skyrocket. Magic? Nope, just complex economics at play.

Concept

As an economy grows, “bottlenecks” or capacity constraints can cause inflationary pressures.

• Closer to Full Employment: More growth leads to more inflation.

🏭 Real-World Example: Imagine a factory running at full speed; if you push it harder, it might overheat. The same with an economy – push too hard, and prices start rising.

Concept

Growth uses natural resources and can harm the environment. But it might also lead to improvements.

• Environmental Kuznets Curve: Pollution rises with growth and then falls after a point.

🌳 Real-World Example: Think of a city planting more trees as it grows richer. Initially, growth led to pollution, but then the city could afford a cleaner environment