How do inflation and unemployment affect the economy in terms of growth (use U.S

Question

How do inflation and unemployment affect the economy in terms of growth (use U.S. as an example)?

Conduct research from viable and credible sources such as, and not limited to, economic journals, periodicals, books, databases, and websites. This assignment should be submitted/uploaded via BC Online on the date the assignment is due. Any late assignment will be subject to a letter grade reduction unless an extension has been negotiated with the professor prior to the due date.

In this written assignment, the quality of your writing and the application of APA format will be evaluated in addition to your content. Evaluation based on these criteria is designed to help you prepare your college projects, which must be well-written and follow APA guidelines. Each written assignment should contain a minimum of 300 words, but no more than 400 words. Make sure that you use correct spelling, grammar, and punctuation.

Explanation / Answer

Inflation can occur due to increase in money supply or due to increase in price levels. The Consumer Price Index (CPI) is the standard measurement of inflation used in the U.S. financial markets. GDP measures the total aggregate output of the U.S. economy. The relationship between inflation and GDP growth has a slippery slope, and most economists in the U.S. believe that 2.5-3.5% GDP growth per year is the most ideal rate that the U.S. economy can safely maintain.

But studies over the past 20 years has revealed that a GDP growth over 2.5% has caused a 0.5% drop in unemployment for every percentage point over 2.5%. But, the positive effects will start to break down when employment get low near to full employment. Very low unemployment rate is more costly than valuable, because the aggregate demand for goods and services will increase faster than supply causing prices to rise, and companies have to raise wages as a result of tight labor market.

Unemployment is a lagging indicator and causes a ripple effect across the economy. If unemployment rate increases, it becomes burdensome for the government to provide insurance thereby increasing states’ deficit and tax revenue. A direct result of unemployment is that foreclosure rates will rise, leading bankruptcy rates to rise, and home values to fall. Hence, many economists believed that by having a firm policy of containing inflation, and the public having reduced expectation of inflation, would allow a favourable compromise between unemployment and inflation.

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