Question

There is a short-run tradeoff between inflation rate and unemployment rate. In the short-run the tradeoff of between inflation rate and unemployment rate creates a challenge for macroeconomic policymakers.

If you were macroeconomic policymaker, how do you balance the short-run tradeoff between inflation rate and unemployment rate? Explain.

What is the historical relationship between rates of unemployment and inflation in the U.S. economy? What are the most current figures for the unemployment rate and the inflation rate? What does this say about the U.S. economy today?

Answer 1

If you were a macroeconomic policymaker, how do you balance the short-run tradeoff between inflation rate and unemployment rate? Explain

There is an inverse relationship between the unemployment rate and inflation which means that when inflation increases, the unemployment rate decreases, and vice versa. There may be some incidents of setting the inflation rate at a predetermined rate and then determining the unemployment rate with the help of historical data. This can facilitate a tradeoff between these two vital parameters without having any negative impact on the economy. When the economy has a growth period, the situation of unemployment will be improved in order to match with the economic growth.

What is the historical relationship between rates of unemployment and inflation in the U.S. economy? What are the most current figures for the unemployment rate and the inflation rate? What does this say about the U.S. economy today?

In the past, in order to obtain a lower rate of unemployment, the attempts used to be made to increase the inflation rate. This inverse relationship between the unemployment rate and inflation can be expressed by using Phillips curve which indicates a high unemployment rate at lower inflation rates. But in recent time, the validity of Phillips curve is under a question mark. In May 2017, the inflation rate in the United States was recorded at a point of 1.9% while the unemployment rate was recorded as 4.4% which can be said to be the lowest in last 15 years. This low inflation and unemployment rates are mainly the outcomes of global competition which made it possible to have lower price ranges. This was further boosted by the technological improvements for large corporations, and demographic changes in the work force

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