Question

Which one between unemployment and inflation do you think is more inportant to stabilize if the policy maler cannot do both at the same time?

Answer 1

The rate of unemployment is an integral indicator of the economic output. There is typically a declining unemployment rate amid rising gross domestic product (GDP), higher wages, and higher industrial production. Through expansionary fiscal or monetary policy, government will usually achieve a lower unemployment rate, and it should be expected that policymakers will regularly seek a lower unemployment rate using those policies. Part of the explanation why policymakers are concerned considering the relationship between the rate of unemployment and the rate of inflation.

An unemployment rate below the natural rate implies the economy expands faster than its normal sustainable rate, which usually puts upward pressure on wages and prices leading to increased inflation. When the unemployment rate increases above the natural rate, the reverse is true: downward pressure is imposed on wages and prices typically leading to reduced inflation. Wages account for a large portion of the cost of goods and services, and upward or downward pressure on wages forces consumer prices in the same direction.