Describe and analyze the economic trade offs that exists with a low unemployment rate, include up...

Describe and analyze the economic trade offs that exists with a low unemployment rate, include up to a minimum of three different ideas?

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Expert Solution

There are different economic trade offs that exists with the low unemployment rate. The first trade off with a low unemployment rate is high inflation. The short run Philips curve shows that lower unemployment rate creates high rate of inflation in the economy. For this Fed takes contractionary monetary policy. It causes temporary reduction in unemployment and in the long run, it comes at a natural rate of unemployment. The second trade off is with low unemployment is higher aggregate demand in the economy. Lower unemployment level is the indication of rising consumption and purchasing power of the people that stimulates the aggregate demand. It shifts aggregate demand to the right and real output increases. The third economic trade off is between low unemployment rate and higher wage rate in the labor market. Lower unemployment level, creates tight labor market situations and firms are to increase wages to attract workers.

Rahul Sunny answered 1 year ago

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