Question

Sometimes politicians or other commentators say: “Unemployment is a more serious economic and social problem than inflation. Increasing inflation by a small amount in order to lower unemployment is therefore worthwhile.: Briefly evaluate this statement.

Answer 1

Answer) Before evaluating the statement,let us see an important concept which is known as Phillips curve which states that is an inverse relationship between unemployment and inflation,now coming to the statement,unemployment is definitely a serious concern because not it affects the person who is unemployed but people dependent on that person(family) and then it leads to cycle of further poverty,decrease in standard of living and could also lead to crime,so yes it is a more serious economic and social problem than inflation,now what commentators are further suggesting is using policies to increase inflation or in other words provide companies an incentive in form of higher prices so they can increase their workforce,now given Phillips curve as a template this may seem like a good strategy,however there have been times in history where same steps have resulted in catastrophe with unemployment staying same or even increasing while no inflation increases,reason for same is rational expectations,when such policies are used,consumer,companies and workers all expect prices to go up and does not expect unemployment to go away,in other words companies knows that down every 6 months there will be some such policy but it does not solve its demand problems,it does not solve its problem with governance issues,it does not solve its issues with protectionism,thus such policies and strategies can lead to more disaster than what it is and should not be blindly implemented,instead the focus should be on increasing demand,creating atmosphere for investment,good and corruption free governance.

Answer is complete.Thank you!