Question

Which is worse for a country: a high inflation rate or a high unemployment rate? Cite at least two pieces of evidence to support your opinion.

Attachments Skills
1. Identify patterns of inflation.
2. Analyze economic benefits and challenges of inflation.

Answer 1

For any economy, high inflation and high unemployment are bad situations. And a combination of both is horrible. But comparing between the two, a higher unemployment rate has worse repercussions. Unemployment not only disturbs the current generation, it also affects the future generations. For example, if the father is unemployed, he will not be able to send his kids to college. Further, they will have to incur a debt which is a worse scenario. Some studies have proven that graduating in a debt has deeper financial instabilities in the future years. On the other hand, a high inflation lowers the purchasing power of the public. But it also attracts high supply and thus can be brought under control. A higher production means high demand for labor. This leads to increase in wages and hence demand. Therefore, inflation is a lesser evil of the two.

In a paper presented by David G. Blanchflower, at a conference held by the Federal Reserve Bank of Boston showed that higher unemployment and higher inflation correlated with lower levels of well-being. But the impact of unemployment was much larger. A one percentage point increase in unemployment lowered the well-being nearly four times as much as an equivalent rise in inflation. The paper was based on surveys of European countries between the period of 1975 and 2012, in which there were evidences of high inflation and high unemployment. In 2003, a paper submitted by Justin Wolfers, an economist at the University of Michigan, reached a similar conclusion using data collected from the United States.