Economic Policy Recommendation. Unemployment and Inflation: Can we find a balance - Essay Example

Download file to see previous pages... The impact of inflation and unemployment on the society’s welfare will also be discussed along with its possible solutions. These solutions would be backed by economic theories and reasoning which will explain why the suggested solutions would prove to be favorable for the society, economy and the markets. All the theories and proposed policies will be backed by scholarly researches which will be cited in-text and at the end of this paper.
Unemployment and Inflation: Can We Find a Balance?
Relationship between Unemployment and Inflation
As the theory of economic cycle depicts, there is inevitably an inverse relationship between inflation and unemployment. Most economies, irrespective of being developed or developing, face the economic problem of low or no economic growth. This has been further elaborated by Weil, D. N. (2005). In his book Economic growth, that it is owes to low economic activity that an economy faces stagnant or no growth. When there is no growth in the economy, no jobs are created and hence, aggregate demand remains low which keeps inflation levels low. On the hand, the unemployment levels are high as owing to no or less economic activity, there will be no jobs in the market. In contrast, when economic activity rises, the economy makes room for more workers and as a result, aggregate demand starts to rise. This causes demand-pull inflation and conversely the unemployment level declines in the economy (Weil, 2005). ...
Developed or underdeveloped, if there is no economic growth, it would either mean that the economy’s resources are lying idle or it has reach at a stagnant point of growth. In the latter scenario, the economy would be facing high inflation as the economic activity in the economy would be at its maximum. Simultaneously, Fellner, W. (1956) further explains that when there is more economic activity in the economy, the employment levels are also high along with the inflation levels. Hypothetically, as the workforce is fully employed, it would demand more and more commodities which will increase the demand pull-inflation. At this point, the economy’s growth would become stagnant as because of inflation, firms would want to cut back their costs and moreover, purchasing power of the households would gradually start to fall. This slows down economic activity and hence, growth becomes stagnant (Fellner, 1956). As firms try to cut back its production, workers will have to be made redundant and as the households lose their jobs, the level of aggregate demand falls which does help reduce inflation but also creates unemployment concurrently. The economic downturn is inevitable after an economy reaches its ultimate point of growth and further takes the economy at a nosedive and takes it to the point where there is low inflation but conversely, unemployment is at a high rate. Impact of low economic growth on the society Friedman, B. M. (2005), mentions in his publication: “The moral consequences of economic growth” that low economic growth, besides causing unemployment, slows down the improvement of the society’s welfare and the standard of living. It also undermines the economy’s potential to earn the GDP in accordance with the ...Download file to see next pagesRead More