Question

Explain the general relationship between inflation, interest rate and unemployment. 2-4 sentences, provide a graph showing the last 20 years.

Answer 1

There is a negative relation exists between unemployment and inflation. This will depicts through the Philips curve. At the same time, there is negative relation between inflation and interest rate. If the inflation increased in the economy, the unemployment will decline through high rate production, because of the increasing price in the economy. Each of these variables shows fluctuations in last 20 years. The fall in unemployment rate will increase the living standard of the people. This increasing living standard was mainly due to the increasing level of disposable income. This will lead to higher saving rates among the people. Thus the interest rate will increase and this increasing interest rate will reduce the level of investment and production in the economy.
In last 20 years, the inflation rate lies between 0.8 to 3.2. The average inflation rate is 3 percent. This lowering inflation rate shows the unemployment rate as 5.76 percent. This depicts the negative relation between inflation and unemployment. The average interest rate in last 20 years is 6.9 percent. Thus the economic is no in a situation of boom or a curse. So the unemployment rate remains the same with specific change in the inflation rate and interest rate.