1. Unemployment and Inflation Tradeoff You go home after studying macro and expl
ID: 1160399 • Letter: 1
Question
1. Unemployment and Inflation Tradeoff
You go home after studying macro and explain the relationship between unemployment and inflation to your grandma. She laments –“sounds like a choice between two evils?” Why would she say this? Assuming she is right, which one would you rather have and why? This should not be a one phrase answer; please, discuss.
2. The Open Economy: American Spending and the Value of the Dollar
This discussion question comes straight out of the textbook. Suppose that Americans decided to spend a smaller fraction of their incomes. What would be the effect on Savings, investments, interest rates, the real exchange rate (of the Dollar), and the trade balance?
Explanation / Answer
1) There is always a trade off between inflation and unemployment . When we try to decrease unemployment by public spending or private setting up of firms , the Aggregate expenditure in the economy rises . Also more employment leads to more AD and more prduction . This causes money supply to rise . So there is inflation . So when unemployment decreases , inflation increases . There is inverse relation between the two .
Nothing is good for the economy in extreme situation . A low level of inflation is good for the economy since it promotes economic growth . But when there is no inflation at all there will be high unemployment . So a balance of both is necessary .
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