n demand owing to a raise in money supply with price increase and supply remaining the same. High levels of inflation loads the economy with greater operation costs and which results in deformation of the industries in the region creating unemployment. Other economists believed that it is the responsibility of the government to restrain unemployment and inflation with "Keynesian policy". "Monetary policy" should be used to pump in money into the economy which increases the GDP and reduce the unemployment rate. The unemployment factors depends on many things such as the side effects of the Vietnam War for US in 1970's and cognisant economic policies for other countries.
The gradient of the long -run Phillips curve is correlated to inflation determination and unemployment determination as a consequence of financial blow. "The standard New Phillips curve (downward-sloping in the short run and vertical in the long run) has recognized difficulties in accounting for inflation persistence and often implies implausible impulse-response functions (IRFs) for unemployment; our Phillips curve (downward-sloping in the short, medium and long run) can generate inflation persistence and plausible unemployment IRFs" (Karanassoua et al. 2005).
The Phillips curve plays a pivotal role in the area of macroeconomics and in the formation of monetary policies framed by the respective governments. Economists look upon the negative correlation between the rate of inflation and the rate of unemployment in Phillips curve as precise and consistent relation to price rise. Research by economists such as Lipsey suggested that "the rate of change of unemployment also has an effect upon inflation in addition to the effect of the level of unemployment" and Gordon highlighted the function of demand increase in determining inflation (Guha and Visviki, 2001). Generally all the previous research concentrates on the "level effects" rather than "rate of change of effects". In the research conducts by Guha and Visviki (2001), the result from the study states that "US job growth is more important than the unemployment rate in determining inflation". The relation between the variables job growth and inflation is found to have greater impact than the current variables. After the post-war era in US, employment growth has a greater enduring authority on price rise following the effect of job loss and the control of unemployment on price rise is little. In the past 10 years, it has been observed that inflation being at its lowest levels, the rate of unemployment has remained low as well.
The Phillips curve is a simple equation that interprets "the impulse-response function of inflation to a monetary shock into the impulse-response function of unemployment to that shock; thus the monetary shock is substituted out in deriving the relation between inflation and unemployment. This curve cannot portray the interplay between money growth and nominal frictions, which is the focus of our analysis" (Karanassou et al., 2008).
Data Description and Data Collection:
The United States has been selected to find the correlation of unemployment and inflation. As US is the world's largest economy with more than $14 trillion in 2009 which is 3 times larger than Japan.
The two variables considered for this study are unemployment and inflation.
Inflation is computed by Consumer Price Index (CPI) method. It is a measure assessing the average cost of goods bought by consumers. It i
