What is happening in the world today shows a short-run effect that unemployment has on inflation – because so many people are being laid off, prices seem to be going down. This, however, is not something done by policymakers but by a virus. These stimulus checks are an example of how strongly policymakers believe in this short-run trade-off idea; the belief is that the economy will be stimulated through all these people spending all this money and therefore getting the ball rolling again, hopefully putting people back to work and shifting the AD curve back to the right.
If, however, policymakers are wrong and there is in fact no correlation, say the crowding-out effect plays a role in this, then that would mean that people are in fact spending their stimulus checks, but because it’s so much money being spent all at once, prices and interest rates may shoot back up quickly to keep up with spending, and this puts us back at square one. And that’s why there is only a short-run trade-off. Eventually, much like Milton Friedman told us, the inflation rate will keep rising regardless of unemployment rate. If policymakers want to decrease a large percentage of unemployment, they have to be careful not to set off a rate of inflation that can eventually cost much more damage to the economy than to begin with.
Eli's blog 