Address one and only one of the following options. A good analysis will refer to

Question

Address one and only one of the following options. A good analysis will refer to economic tools/models developed over the quarter and consider alternate viewpoints or models.

Option 1

Analyze whether economies should be concerned about inflation (i.e. identify some of the costs of inflation and unstable prices) and whether they should devote resources towards reaching an inflation rate of 0%.

Option 2

Analyze whether economies should be concerned about unemployment and whether they should devote resources towards reaching an unemployment rate of 0%.

Explanation / Answer

The economies must be more concerned about the unemployment level in the economy.

Option 1:

There are various costs associated with inflation. Among these are the menu cost, the uncertainity of the future returns, the reduced competitiveness of the goods at the international market unstability in the economy which may consequently result in the recession. Maintaining a low and medium inflation can help the economy. However, if the inflation is reduced to zero the producers are not incentivied and thus this may shift the Aggregate supply curve for the economy towards the left. As the inflation is reduced to 0% the incentive of profit is eliminated and producers cut back supply which retards the   growth process in the economy.

Option 2:

A low unemployment rate reflects that the economy is doing well. There is a lot of production an d income generation taking place in the economy. This high income in the economy boosts the demand in the economy which further increases the production and thus the output. With resources devoted to employment generation the aggregate demand will increase and so will the output. Thus the economies must be concerned about unemployment reduction.

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