Question

Assume that the current annual inflation rate in our country is 2.0% and the unemployment rate is 4.4%.

If you were an advisor of President Trump and Treasury Secretary Steven Mnuchin, and today you were asked to recommend only ONE of the following objectives: lower inflation OR lower unemployment, which would you choose? Explain why you selected one over the other.

Answer 1

I'd select lower unemployment at the cost of high inflation because at this stage where we are all battling COVID 19 pandemic, the job markets are in a mess. Due to the fear of virus, people have started lowering their demands and aggregate demand has come down in the economy. This is just an example which I'm giving to illustrate my point!

A lower aggregate demand makes the firms to lay off workers to cut down costs. This marks the recession in the economy, which has disastrous impacts on the employment of the economy. A large section of Americans have lost their jobs.

Hence, it's super important to increase the aggregate demand to pull the economy out of this recession. Although that will mean undertaking expansionary monetary and liberal fiscal policies, it would help people to increase their demands for goods and services. Only when the aggregate demand rises, firms would be eager to employ more people to cater to the increased demand and earn more profits.

This way we can check the unemployment in the economy which is now larger than the inflation rate. If we wanted to check inflation instead, it would cause even more problems in the job market and increase the unemployment to dangerous levels, which we of course don't want at all.

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Hope this helped you to give an idea! Cheers!