Inflation And Unemployment Essay

Friedman (1973) succinctly summarized the inconclusive nature of the relationship between inflation and unemployment on economic growth as follows: ―historically, all possible combinations have occurred: inflation and unemployment with and without development, no inflation and unemployment with and without development. The main problems facing the economy of Iraq today are unemployment and inflation. These problems are persistently complex and cause economic and social dilemma to the economy as a whole. The inability of government to provide a lasting solution to these twin challenges has contributed

Economic policy of every country has different aims that usually include the following ones: sustainable growth and development (increase in output (GDP) growth), price stability (inflation targeting), high employment etc. The policymakers have different tools to manage these issues, primarily by influencing the aggregate demand and supply, such as interest rates, requirements to the bank reserves, tax rates etc. Therefore, this is crucial to understand how these macroeconomic indicators are interconnected, such as for example output and unemployment, unemployment and inflation, and the mechanism of policy actions in each case. Thus, the aim of this essay is to explain how the government should conduct the economic policy in order to achieve the aims, focusing particularly on the unemployment.

The President of Bartavia wants to enact expansionary fiscal policy with the intention of manipulating inflation and unemployment. Although Bartavia is nearly employing all of its resources in production and extremely close to full employment level, the President is still concerned about the small percentage that is unemployed. Unemployment is the state of a person without a job or a reliable salary or income. Inflation and unemployment are characteristics that are closely monitored to indicate the economic performance of a country. As the economic advisor to the president, I would strongly advise against implementing this policy. Currently, the economy is not in a recession making the trade-offs associated with economic expansion counter intuitive. In addition, the Phillips Curve demonstrates the inverse relationship between inflation and unemployment, making the need for expansionary action unnecessary right now. Finally, Okun 's Law shows how this policy would effect Bartavia 's GDP via the sacrifice ratio. These three reasons show that the long-run consequences outweigh the short-run benefits of expansionary fiscal policy. Therefore, I implore the President to avoid implementing the expansionary policy.

However, during a period of global recession the Government’s implementation of expansionary fiscal and monetary policy saw taxation revenue fall and government spending increase, sending the budget into deficit by -$32.9 billion in 2008-09 . The 2009-2010 Budget continued expansionary policy to support economic growth and slow the rise in unemployment. The falling inflation rate of 1.5% in 2008-09 , meant it no longer played dominant role in policy making decisions. The tradeoff between inflation and unemployment can be observed in Figure 3.5 .

The police procedural TV series, Crime Scene Investigation (CSI), had episodes where a case unravels to reveal more than one case; intersecting each other. The suspect in one murder can be a victim in another. The chains of the relationship become a sophisticated network I find engrossing. The inverse interaction between inflation and unemployment as delineated in the Keynesian Phillips curve has proven a rise in one variable can lead to a fall in another in the short run. However, the Monetarist’s expectations augmented-Phillips curve suggested the two variables are always spiraling upwards in the long run. The elements operate dependently because a change in inflation will eventually affect employment and vice versa. In order to reduce both unemployment and inflation but still have positive economic growth that is when Aggregate Supply comes in and intervenes.

Over the last few years GDP, inflation, and unemployment rates have fluctuated. Currently, they seem fairly stable. GDP is at a 2.1% growth rate. The trend hasn’t changed much over time. It seems that the only thing that has really shrunk throughout time with GDP is the amount of exports the US sends out, whereas personal consumption, government spending, and investment added ‘percentage points’ to the growth rate. With the growing GDP, unemployment rate appears to be decreasing. While it is at 4.5%, this is significantly lower than it has been in the past. The growth of GDP has allowed for new investments in technology and being able to find new ways to produce goods and services, thus causing problems with unemployment. Despite the fact

Now the conflict between inflation and unemployment is a little different. During a period of strong GDP growth, falling unemployment will create a demand-­‐pull and cost-­‐push inflation leading to a decline in the real purchasing power of money. There are policies designed to control demand-­‐pull or cost-­‐push inflation for example by reducing aggregated demand but may lead to a contraction of output and a rise in unemployment. Similar to how inflation can conflict with unemployment, deflation may also lead to a rise in unemployment.

The relationship between inflation and unemployment is a topic, which has been debated by economists for decades. It is this debate that has made the opinions about it evolve. In this essay, the controversial topic will be discussed by viewing different economists’ opinions on that according to time sequencing.

By obtaining data for two countries, UK and France, on unemployment rate and CPI, which allowed me to calculate inflation rate and then further the change in inflation rate, I have been able to construct the table above. This table clearly shows the comparison between the two countries between the time period of 1970-2013. From this table I am able to create graphs to represent the data in an aesthetically pleasing format - a picture says a thousand words. Firstly I will begin by discussing the unemployment rate graph.

Both unemployment and inflation are two important components when it comes to studying an entire economy and it is also very easy to get those statistics from the Bureau of Labor Statistics (BLS) which is a governmental statistical organization that gathers, processes, analyzes, and broadcasts important statistical figures to the American public, the U.S. Congress, other Federal agencies, State and local governments, business, and labor. The Bureau Labor of Statistics also assists as a statistical resource to the Department of Labor, which main drive is to support, nurture, and improve the wellbeing of the labor force (All individuals ages16 and up, who are working or seeking employment), and retirees of the United Sates.

Unemployment and inflation both have long-run determinants, although natural unemployment is dependent on numerous features of the labor market, like minimum-wage laws, unions’ market power, efficiency wages, and the effectiveness of the job search. Growth in money supply is the primary determinant of the inflation rate, and it is controlled by Bartavia’s central bank. Therefore, inflation and unemployment do not affect one another in the long-run.

In the 70’s Friedman developed his theory of inflation on the correlation of inflation and unemployment on the basis of a critical analysis of the (Keynesian) Phillip’s curve. The key elements in the examination of the mutual links between the inflation process and the situation in the labor market are in his construct a natural rate of unemployment, (adaptive) expectations of inflation, as well as a

Discuss the role of government policy in reducing unemployment and inflation. In your discussion make use of the diagrammatic representation of the macroeconomy developed in lectures in Term 2

Inflation forecasting plays a central role in monetary policy formulation. Recent international empirical evidence suggests that with the decline in inflation of recent years, a fairly widespread phenomenon, the combined dynamics of this variable and its potential predictors, such as money or different measures of the output gap, has changed, and inflation has become more unpredictable. Univariate models tend to show a better forecasting capacity than those based on various inflation theories, such as the Phillips curve. Traditionally, in industrialized countries the Phillips curve has played a predominant role in inflation forecasting, and according to Stock and Watson (1999), Atkenson and Ohanian (2001) and Canova, (2002), it would seem to perform better in terms of forecasting error than other alternative models. In recent years there have

The inflation rate in Zimbabwe was recorded at -1.64 percent in April of 2016. Inflation Rate in Zimbabwe averaged 1.12 percent from 2009 until 2016, reaching an all time high of 5.30 percent in May of 2010 and a record low of -7.50 percent in December of 2009. Inflation Rate in Zimbabwe is reported by the Reserve bank of Zimbabwe. As inflation rates is too high at Zimbabwe it has an impact of uncertainty on the allocation of labor resources and shows that the economy produces less output with a given quantity of productive resources. The labor market’s reaction to unanticipated inflation depends upon the flexibility of nominal wages. As a general rule, both the quantity of labor services that workers supply and the quantity that business firms demand depend upon the real wage rate the nominal wage rate adjusted for the level of prices .The interaction of the supply and demand for labor determines the equilibrium value of the real wage the nominal wage adjusts upward or downward as inflation. Since 2009, Zimbabwe’s economy has started to recover from the 1999-2008 crises that saw economic output cumulatively decreasing by more than 45%. The country is ranking very low on many key labor market indexes such as doing business, Government Indicators .On the other hand, Zimbabwe has experienced a high increase of gross capital formation, which reached 25% of GDP in 2012 in comparison with 2% in 2006.