Why are the inflation rate and unemployment rate moving in the directions that they are? How...

Why are the inflation rate and unemployment rate moving in the directions that they are?
How do inflation and unemployment relate to the interest rate?
What is the relationship between wage growth and inflation?

Expert Solution

Inflation rate and unemployment rates always move in opposite directions.

This is because when inflation is high, it means the economy is experiencing rising price levels.

This makes producers increase their production levels in order to increase sales at high prices and make higher profits.

In order to sustain high production, they start hiring more labor, leading to fall in unemployment rates.

Thus, one can see how inflation and unemployment move in opposite directions.

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As interest rates decrease, people start borrowing more money, as cost of borrowing money falls.

As more money is borrowed, consumer income and spending rises. This leads to inflation in the economy. As inflation rises, eventually unemployment falls.

Thus, Interest rates are negatively related to inflation and positively related to unemployment.

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There exists a positive relationship between wage growth and inflation.

This is because higher wages increase consumer income and spending power. This leads to an increase in demand for goods and services. This leads to a rightward shift of demand curve, leading to an increase in price level or inflation.

Rahul Sunny answered 1 year ago

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