The link between inflation and unemployment economics essay

A small rise in prices or a sudden rise in prices is not inflation since these may reflect the short term workings of the market.

Such a situation is called DPI. The trade-off suggested by the Phillips curve implies that policymakers can target low inflation rates or low unemployment, but not both. The Philips curve has been illustrated below in order to depict the relationship between unemployment rate and inflation of an economy Krugman and Wells, Therefore, in response, they may cut interest rates to try and boost economic growth.

By the same token, a lower rate of inflation should not inflict a cost on the economy through a higher rate of unemployment. But the consequence of hyperinflation is disastrous.

However, aggregate demand may rise following an increase in money supply generated by the printing of additional money classical argument which drives prices upward. Relationship Between Inflation And Unemployment Add in library Click this icon and make it bookmark in your library to refer it later.

In the past, some of the world economies e. The functional form of the model which is as follows: The simple intuition behind this trade-off is that as unemployment falls, workers are empowered to push for higher wages.

Inflation in an economy may arise from the overall increase in the cost of production. An increase in aggregate demand will increase both prices and output, but a supply shock will raise prices and lower output.

Essay on Inflation: Types, Causes and Effects

Cost of production may rise due to increase in the price of raw materials, wages, etc. Higher export earnings increase the purchasing power of the exporting countries.

In other words, inflation is a state of rising price level, but not rise in the price level. In the later Clinton years many economists warned that if unemployment was brought any lower, inflationary pressures might spin out of control. The inverse association between these two factors can be demonstrated with the aid of Philips curve.

Thus, it redistributes income and wealth. In this section, the focus will be shifted towards the historical data regarding inflation rate, growth rate and rate of unemployment in Australia for establishing the relationship between these three factors.

Thus, there occurs a redistribution of income and wealth. According to classical economists or monetarists, inflation is caused by the increase in money supply which leads to a rightward shift in negative sloping aggregate demand curve. Some individuals gain because their money incomes rise more rapidly than the prices and some lose because prices rise more rapidly than their incomes during inflation.

Similarly, beneficiaries from life insurance programmes are also hit badly by inflation since real value of savings deteriorate. The way the hyperinflation affects economic growth is summed up here.

Its intensity or pace may be different at different times. The Equation obtained after running the OLS model is: Inflation exists when money supply exceeds available goods and services.

This type of inflation is known as cost-push inflation henceforth CPI. Not only this, CPI is often imported from outside the economy. The recession was so sharp that investment and consumption have fallen dramatically and so the cuts in interest rates have only mitigated the extent of the downturn House Price falls provide a powerful negative impact on spending.

Thus, money plays a vital role. The growth and development of the nation is significantly reliant upon these variables. During inflation, usually people experience rise in incomes. The nominal incomes of such people outstrip the general price rise. Therefore, over the long-term, higher inflation would not benefit the economy through a lower rate of unemployment.

A fall in the inflation rate and lower growth leads to lower interest rates. And rising prices, again, prompt trade unions to demand higher wages.

Economic essays on inflation

Workers will demand 10 p. However, the relationship between inflation and unemployment is still controversial; according to history, it is likely that how the economists’ thinking about the relationship evolves over time will mostly depends on how the economy develops in the future.

off between unemployment and inflation depends on the notion of excess demand. As long as aggregate demand exceeds economic capacity, the unemployment rate will tend to fall, and vice versa.

A good example of link between unemployment and inflation can be seen in the United States. The graph below shows the history of unemployment and inflation in the United States since The four decades of data illustrates some of the causes of rising or falling inflation. In other words the trade-off between inflation and unemployment rate does not exist, except in the same year, and in the long run unemployment is a positive function with inflation (Niskanen ).

Namibia, using the time series data fromexhibits the presence of stagflation in its economy. Generally, there is a negative link between the unemployment rate and the inflation rate.

Thus, it is important to identify the pattern of both the inflation rate and the rate of unemployment. In the below mentioned table, relevant information about the two mentioned factors is being provided from the year (Fasenfest, )/5(14K).

As the nature of inflation is not uniform in an economy for all the time, it is wise to distinguish between different types of inflation. Such analysis is useful to study the distributional and other effects of inflation as well as to recommend anti-inflationary policies.

The link between inflation and unemployment economics essay
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Essay on Inflation: Types, Causes and Effects