Question

Instructions

How do inflation and unemployment affect the economy in terms of growth (use U.S. as an example)?

Conduct research from viable and credible sources such as, and not limited to, economic journals, periodicals, books, databases, and websites. This assignment should be submitted/uploaded via BC Online on the date the assignment is due. Any late assignment will be subject to a letter grade reduction unless an extension has been negotiated with the professor prior to the due date.

In this written assignment, the quality of your writing and the application of APA format will be evaluated in addition to your content. Evaluation based on these criteria is designed to help you prepare your college projects, which must be well-written and follow APA guidelines. Each written assignment should contain a minimum of 300 words, but no more than 400 words. Make sure that you use correct spelling, grammar, and punctuation.

Answer 1

• Inflation can occur due to increase in money supply or due to increase in price levels. The Consumer Price Index (CPI) is the standard measurement of inflation used in the U.S. financial markets. GDP measures the total aggregate output of the U.S. economy. The relationship between inflation and GDP growth has a slippery slope, and most economists in the U.S. believe that 2.5-3.5% GDP growth per year is an ideal rate that the U.S. economy can safely maintain.

• According to Phillip Curve, there is a negative relationship between unemployment and inflation rate. When inflation rate is high, means price level is high, then firms would produce more and employ more labor, thus employment rate rises and uemployment rate falls. For an economy, it has to tradeoff between choosing high inflation and low unemployment or low inflation and high unemployment. But in the long run, the phillip curve relation does not hold, it means unemployment in the long run is always equal to its natural rate, and any policy which tries to lower the unemployment rate in the long run, would result in a rise in inflation and keeping unemployment rate unchanged from its natural rate.

• But studies over the past 20 years has revealed that a GDP growth over 2.5% has caused a 0.5% drop in unemployment for every percentage point over 2.5%. But, the positive effects will start to break down when employment get low near to full employment. Very low unemployment rate is more costly than valuable, because the aggregate demand for goods and services will increase faster than supply causing prices to rise, and companies have to raise wages as a result of tight labor market.

• High inflation is bad for lenders and good for borrowers. In high inflation, the value of money keeps on declining. While a high unemployment means low employment. Both retards economic growth of the economy. Thus, an economy has to make a balance between the inflation rate and unemployment rate.