The Relationship Between Inflation And Unemployment

The more Americans employed means we as a nation are experiencing economic growth. However, if there is a high unemployment rate this interprets that more Americans are struggling in our economy. There are several types and reason for high unemployment. Though America’s unemployment rate was 5.6%, as of December 2014, every state’s unemployment rate varies for different reasons. America’s unemployment rate has a direct negative impact on our entire nation’s economy and affects individual firms, organizations, and people.

Consequently, Keynes brought clarity to the subject of the Great Depression and unemployment, his argument suggested that unemployment may not be a temporary condition that the system could naturally recover. Keynes believed that unemployment could in fact reach equilibrium. In this article the Depression was seen as a condition of unemployment brought about a

The Undesirable temporary connection between Price increases and Unemployment. The inflation is calculated along the perpendicular axis, and the unemployment percentage is calculated along the plane axis. This can disturb both the unemployment percentage or the price increases, it can disturb the splurging and the economy. It will partake in temporary impacts in anticipation of the economy being secure.

Inflation is an increase in the average overall price for goods or services while deflation is the decrease of average overall price for goods and services. Inflation always produces the effect of reducing the value of money and reduces the value of future monetary obligations. Reducing the value of money means a consumer has less money to buy services or goods. Reducing the value of future monetary obligations means investing or lending becomes more restricted as the value of return will be less than the amount paid back. Economist Arthur Okun analyzed the relationship between Unemployment and the GDP statistical. Okun’s law simply states that with rising unemployment there is a relationship of slow growth. Unemployment is a person looking for work and unable to find work. Deflation is the value of any amount of money rises. Deflation makes borrowers less likely to borrow because the value of the money they have to pay back will raise.

This paper is about how the high unemployment rate has an affect on the economy. The high unemployment rate had an affect on the Gross Domestic Production as well how it had an affect on the economy as well. This paper covers when the Gross Domestic Production went up the unemployment rate had gone down as well. The high unemployment rate also had direct ties to the economy, because if people are not working they are not going to spend money on house hold goods which is what drives the economy.

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

Written by Paul Krugman and Robin Wells, Macroeconomics states, “In general, the unemployment rate is a good indicator of how easy or difficult it is to find a job given the current state of the economy” (Krugman and Wells 219). A New York Times article, Strong Unemployment News Bolsters Case for Fed to Raise Rates written by Reuters, talks about how unemployment rate benefits are holding steady with a steady labor market and how job openings are rising, which is encouraging the Federal Reserve to higher interest rates. As explained in Macroeconomics, by Krugman and Wells interest rates refer to, “The price, calculated as a percentage of the amount borrowed , that lenders charge borrowers the use of their savings for one year” (Krugman

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.

Furthermore, there is diverse view about the cause of unemployment. The classical economists debated that unemployment occurs due to the supply side factors such as frictional unemployment, structural factors, et al., while Keynesians emphasizes on demand deficiency unemployment, which means that unemployment is caused by insufficient economic growth and low aggregate demand

Unemployment and inflation have an inverse relationship meaning that as one increases, the other decreases. According to the textbook, an ideal situation for the Federal Reserve would be to achieve both a low level of unemployment and a low level of inflation. After the 9/11 attacks in New York, the United States was put in a tragic financial crisis that led to the recession in 2008.

An expectation is something that people think will happen. Expectations, especially when an economy is experiencing hard times, influence economic decisions because there is no crystal ball to predict or guarantee the future trends of the economy. Individuals often alter their expectations pertaining to the future of an economy based on the current economic condition and data available. Key economic variables such as price, income, taxes, and sales are affected by the expectations of decision makers in an economy and have the potential to change the way the economy operates. Expectations affect demand and heightened uncertainty reduces economic activity and holds down inflation.

The Changes in demand will influence the both the inflation and unemployment rates that the economy goes through in the short-run. In some cases it has been seen that there was both a fall in inflation and fall in unemployment; for example, during the 1990s in the United Kingdom, unemployment fell, but inflation stayed low. This therefore proved that it is probable to reduce unemployment without causing inflation. Further research Pettinger (2011) showed that “you could argue that there is still a potential trade off except the Phillips curve has shifted to the left, because there is now a better trade off. It also depends on the role of Monetary policy. If monetary policy is done well, you can avoid some of the boom and bust economic cycles we experienced before, and enable sustainable low inflationary growth which helps reduce unemployment.”

The first challenge to this theory was by Milton Friedman and Edward Phelps who in individual analysis showed that the Phillips curve could not hold in the long run. Friedman asserted that rational employers pay inflation adjusted wages and this ensures that there is a natural rate of unemployment which is self adjusting in the long run. Therefore the state cannot be able as a matter of policy to regulate inflation by pushing unemployment below the natural rate as it will readjust itself to this rate. In the long run the inverse relationship between unemployment and inflation as posited by Phillips could not hold. His assertion was validated in the 1970’s when there was an increase of inflation from around 2.5% to 7% and the unemployment rate also increased from around 4% to 6%. He therefore contributed to the Phillips theory by creating a distinction between the short run relationship and the long run relationship.

The project that the group will be handling is about Inflation and how can these four

Some variables in Economics are very close related to each other. In many cases, the combination of these variables can cause an unexpected effect on the economy. One of these examples can be observed using the Phillips Curve. This curve can be used as a tool to represent the inverse relationship between inflation and unemployment in the short-run. In order to comprehend this inverse relationship, we must first know what inflation is, how we define unemployment, and how these two variables are connected using the Phillip Curve. If we understand the meaning of each one of these variables in the economy, it will be easier to comprehend the logic of a short-run tradeoff between unemployment and inflation.