Question

1.EXplain how inflation affects savings?
2. Why might a favovable change to the economy such as technological change or a decrease in the price of imported oil be associated with an increase in frictional unemployment?

short answer required

Answer 1

Answer 1

Household can either spend or save from their income. When inflation rises means they need to spend more for same goods and since income is constant, the households will reduce the savings to counter the effect of inflation on the Budget.

Hence high Inflation rates will tend to reduce Savings

Answer 2

When there is a technological change, the labors with the that particular technical knowledge will start looking for alternate jobs as there will be a scope of higher wages hence more number of workforce will move from one job to another. Hence it will increase frictional unemployment.

Similarly when imported oil prices reduce, the cost of production tends to reduce and firms may start to produce more to maximize profits. In a process they will hire more labors even at a higher wage. Hence more number of workforce will start moving from one job to another for better wages. Hence it will increase frictional unemployment.