Saturday, December 21, 2019

Inflation And Unemployment Essay - 1260 Words

Historically, the relationship between inflation and unemployment has been studied, debated, and been used as economic indicators to explain the overall health of the economy. Both inflation and unemployment will fluctuate and change based on phases of the business cycle. From a simplistic view, high levels of inflation and unemployment indicate that the economy is not operating at is an optimal level of output. During periods where inflation and unemployment are high, individuals are saving more and businesses are operating at excess capacity. The key is to understand and study this relationship to better understand its overall effect on the economy and how to control levels of inflations and keep unemployment low. Inflation occurs when†¦show more content†¦With these slower growth rates, businesses were operating at excess capacity which increased levels of unemployment and rising inflation. During the mid-1970’s unemployment rates soared to approximately 11 percent inflation rates spiked to approximately 12 (Cashell Labonte, 4). This gave rise to the natural rate hypothesis which explained that unemployment could be more simply viewed under the supply and demand instances. The natural rate was formulated around the idea that as the unemployment rate decreased there was a need to increase wages to combat the increase in prices. Increasing real wages would keep unemployment low and stabilize inflation rates in the long-run. Fluctuations in the unemployment rate can be influenced by many different factors. The demand for employees can vary based changes in technology, population, shifts, and skills need in manufacturing and service industries, and overall growth of the economy (Cashell, 13). Critics of the natural rate believe unemployment cannot be so easily explained by supply and demand. During the mid-1990’s unemployment fell below 4% below the estimated natural rate and economist believed that a spike in inflation would follow, however, this did not occur. During this time period inflation rateâ₠¬â„¢s decreased. Many believed that the reason for both low unemployment and inflation was due to a surging economy leading to high levels of productivity and output while keepingShow MoreRelatedEssay on Global Inflation and Unemployment1279 Words   |  6 PagesEarthTimes and titled â€Å"European inflation climbs unemployment at 12-year high was posted on Friday July 30 2010. The article reports that food and energy costs have played a critical role in driving up inflation in the 16-member eurozone. The rates of unemployment remained stagnant to its highest level during this time. Introduction The recent global financial crisis that affected not only America but also Europe and other parts of the world resulted in massive unemployment. 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