Question

What are the effects of unemployment and inflation on the nation’s economy? Which one between unemployment and inflation do you think is more important to stabilize if the policy maker cannot do both at the same time? Discuss in Detail

Answer 1

Effect of unemployment - When someone loses a job, a family is affected. When many people lose their jobs, eventually the whole nation is affected.Workers lose income, while the country loses production and consumer spending.

With one person losing his job, there is one less person that will pay state and federal income taxes, one less person that will pay additional sales tax revenue as a laid off worker will instantly cut back on their non-necessary spending due to less disposable income.In addition, practically every unemployed citizen in the U.S. will become eligible for unemployment insurance and will start slowly sucking money from the economy rather than contributing to it in the form of taxes. so government will increase taxes to recover losses will lead again to labour cut or unemployment.  

Effect of inflation - high rate of inflation is not good for the economy. Inflation will always reduce the value of money, unless interest rates are higher than inflation.An increase in inflation means that prices have risen. With an increase in inflation, there is a decline in the purchasing power of money, which reduces consumption and therefore GDP decreases. High inflation can make investments less desirable, since it creates uncertainty for the future and it can also affect the balance of payments because exports become more expensive. As a result, GDP is decreases further. So it appears that GDP is negatively related to inflation.

The Phillips curve, shows that high inflation is consistent with low rates of unemployment, implying that there is a positive impact on economic growth.

It is important to stabilize inflation first .