IV.

Inflation

For several decades after World War II (1939-1945) the main inflation theories were demand-pull and cost-push. The cost-push theory basically emphasized the role of excessive increases in wages relative to productivity increases as a cause of inflation, whereas the demand-pull theory tended to attribute inflation more to excess demand in the goods market caused by expansion of the money supply. A central concept in inflationary theory since the mid-1950s has been the Phillips curve, which relates the level of unemployment to the rate of inflation. The Phillips curve suggests that society can make a choice between various combinations of inflation rate and unemployment level. Many economists, however, dispute whether such a choice really exists, saying that in order to keep unemployment under control it will be necessary to accept continuously increasing inflation. At the same time many other economists dispute whether a stable relationship between unemployment and the level of real wage demands exists.