The Relationship Between Inflation And Unemployment On Growth

The United States is slowly losing its economic stability due to the problem of inflation. Inflation is the general increase in prices and fall

In any economy, no matter whether it is controlled by the government or by free markets, people need to work in order to support it. The government does not generate tax revenue by magic. There have to be people in that economy earning an income to ensure that the government continues to collect taxes. In a free market economy, the same applies because there are some services which only an organized government can supply (such as protection from extra-national threats), but there also those which the people get for themselves because of the working of the markets. In any scenario, unemployment is, at the very least, a drag on the economy, and it can be much worse. This paper examines how the unemployment rate in the United States is underreported, and how that fact effects the sluggishness of the present economy.

1. What is inflation? Inflation is an increase in prices for goods and services (What is Inflation?).

There is always some unemployment resulting from workers failing to hook up with potential employers due to imperfect information. However, neither the demands nor supplies of labor nor the pattern of information among firms and employees is affected by inflation. Hence, inflation cannot affect the level of employment and unemployment and the Phillips curve is as shown. Both inflation and deflation have no affect on unemployment and output. Therefore, from this standpoint, all rates of inflation are optimal. Inflation simply does not matter.

Inflation hinders economic growth. For example, when inflation is high, goods and services cost more, and people tend to spend less. High inflation also causes less long-term planning associated with spending money, such as home building and investing. Businesses are affected in the same manner. When inflation goes up, and down inconsistently, people become weary of spending, exacerbating their fears that they won’t be able to pay their bills. Long-term interests also go up, due to high inflation. The cost added to long-term interest rates compensates for the risk associated with inflation. Additional costs on interest rates make people less willing to take on a loan. When, the demand for goods and services is low, then the supply of goods up, the production of those goods has to decrease, giving rise to

It widely recognized that the monetary policy within a country should be primarily concerned with the pursuit of price stability. However, it is still not clear how this objective can be achieved most effectively. This debate remains unsettled, but an increasing number of countries have adopted inflation targeting as their monetary policy framework. (Dr E J van der Merwe, 2002) This topic of Inflation targeting is a subject which immediately conjures different perceptions from different people. Many feel that low inflation should be a main aim of monetary policy, while others (such as trade union activists) believe that a higher growth rate to stimulate jobs should be the main concern.

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 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.

Inflation is a possible cause of higher unemployment in the medium term if one country experiences a much higher rate of inflation than another, leading to a loss of international competitiveness and a subsequent worsening of their trade performance. If inflation in the UK is persistently above our major trading partners, British exporters may struggle to maintain their share in overseas markets and import penetration into the UK domestic market will grow. Both trends could lead to a worsening balance of payments. The UK government believes that monetary stability (i.e. low inflation) is a precondition for sustained economic expansion.  As the chart below demonstrates, the UK has made progress in reducing the volatility of its inflation rate in the last decade. The era of high and volatile inflation may have come to an end.

In the months of June and July during the year 2011, the total number the total number of people employed declined by 155,000. Meaning that that many people either quit or lost their job. But, in that same year the unemployment rate happened to decrease. The Decline of such number was most likely due to the banking failure during 2008 all the way to 2011. This would cause a cyclical unemployment issue due to the market falling under. Causing the businesses no other choice than to let people go during this economic hardship due to not being able to keep up with their net income and net losses. With that happening, most economist and investors would expect none other than the unemployment rate to increase. Thus, that wasn’t such case. Instead the unemployment rate decreased during that period. This could have happened from two of many different possibilities. The first being the gradual decrease of the United States population growth due to the baby boomer generation decreasing, causing the total population to decrease and causing a lower number of employees. The second choice being that of those 155,000 employees who were laid off, most didn’t try to look for new jobs and became what we call discouraged workers. With that happening, since economist don’t put discouraged worker in the workforce equation, the previous number of total workforce decreased.

Monetary policy effects the GDP inflation. “Between 1996 and 2000, real GDP in the United States expanded briskly and the price level rose only slowly. The economy experienced neither significant unemployment nor inflation. Some observes felt that the United States had entered a “new ear” in which business cycle was dead. But that wishful thinking came to an end in March 2001, when the economy entered its ninth recession since 1950. Since 1970, real GDP has declined in the United States in five periods: 1973-1975, 1980, 1981-1982, 1990-1991 and

Disadvantages of inflation include high inflation rates that can cause hesitation and mistakes leading to less investment. It is discussed that countries with higher inflation, have lower rates of investment and economic growth. The higher the inflation the lower world-wide competitiveness. Another disadvantage is menu costs and the costs of changing price lists, stabile wage growth and declining incomes. Most importantly it can dcreas the real value of savings, which may affect older people who live on savings. However, it does depend on whether interest rates are higher than the inflation rate.

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