This relationship has presented the regulators with a number of problems. The relationship between unemployment and inflation is also known as the Phillips curve. In the short term the Phillips curve happens to be a declining curve. The Phillips curve in the long term is separate from the Phillips curve in the short term. It has been observed by the economists that in the long run the concepts of unemployment and inflation are not related.
As per the classical view of inflation, inflation is caused by the alterations in the supply of money. When the money supply goes up the price level of various commodities goes up as well. The increase in the level of prices is known as inflation. According to the classical economists there is a natural rate of unemployment, which may also be called the equilibrium level of unemployment in a particular economy. This is known as the long term Phillips curve. The long term Phillips curve is basically vertical as inflation is not meant to have any relationship with unemployment in the long term.
It is therefore assumed that unemployment would stay at a fixed point irrespective of the status of inflation. Generally speaking if the rate of unemployment is lower than natural rate, then the rate of inflation exceeds the limits of expectations and in case the unemployment is higher than what is the permissible limit then the rate of inflation would be lower than the expected levels. The Keynesians have a different point of view compared to the Classics.
The Keynesians regard inflation to be an aftermath of money supply that keeps on increasing. They deal primarily with the institutional crises that are encountered by people when they increase their price levels. As per their argument the owners of the companies keep on increasing the salaries of their employees in order to appease them. They make their profit by increasing the prices of the services that are provided by them. This means there has to be an increase in the money supply so that the economy may keep on functioning. In order to meet this demand the government keeps on providing more money so that it can keep up with the rate of inflation.