When money is not pumping into the economy, its growth becomes sluggish. An economy may show signs of jobless recovery with a continual increase in the rate of unemployment. Such a growth may lead to a slow recovery from the recession in the future, or may be an indicator of double-dip recession. Due to increase in competition for jobs and wide availability of labor, the cost of labor decreases significantly. Those who are employed will be severely affected in case of a rise in unemployment in the economy.
Inflation can lead to unemployment, as people demand less due to higher prices and therefore demand for labor maybe decreased. Inflation also creates uncertainty for entrepreneurs, cost curves increase and revenue can decrease thus squeezing profits. Also when inflation is in the mind of the entrepreneur it can escalate easily as they will take inflationary actions like automatically increase prices and therefore it is imperative government spending/borrowing is controlled. Although government borrowing does increase the money supply, the monetarist view of a direct link between money supply and inflation is wrong, as proved when Britain experienced recession under Margaret Thatcher. In order to control the money supply the government cut borrowing and spending, which in theory would reduce the money supply, inflation and unemployment but interest rates had to rise to stop consumer borrowing, which in turn increased the exchange rate.
When the Central Bank uses expansionary monetary policy, the money supply increases whilst the interest rates fall. This is because when money is readily available in the economy due to monetary expansion, the interest rates will fall due to the fact that people will be more willing to make loans as oppose to taking out loans. Reduced interest rates will cause domestic financial and capital assets to become less attractive as a result of their lower real rates of return. In addition to this, foreigners will reduce their position in domestic bonds, real estate, stocks and other assets. The financial account with deteriorate as a result of foreigners holding fewer domestic assets.
This will decrease the money supply because banks are not able to lend out as much money to customers. Conversely, if the required ratio decreases banks are required to hold a lesser amount of money in reserve therefore increasing the money supply because banks can lend out mo... ... middle of paper ... ...up. Inflation and GDP are directly related to each other however, a strategic combination of the macroeconomic tools could allow the Fed to control inflation with out affecting GDP, if it is within acceptable limits. When inflation is too high the economy is at risk of crashing because the value of currency is too low. Conclusion Unemployment is inversely related to changes in GDP.
They are influenced by monetary policy; when demand weakens, the fed lowers interest rates, which in turn stimulates the economy, by allowing the consumer to spend more and the industry to produce thus job retention is good. In contrast, continuous stimulus to increase salary or if demands falls, productivity will decrease, jobs are lost and this will push the economy's inflation higher. The Fed just tries to smooth out the bumps of natural business cycle. Inflation is an economy wide rise in prices which is bad because it makes it hard to tell if a business product price is going up because of higher demand or inflation. Inflation also adds premium to long-term interest rates.
In the short-run, the relationship between unemployment and inflation is inverse. This means that the change in one will have the opposite effect on the other. So here, a fiscal policy aimed at reducing unemployment will increase the interest rate. For example, if Bartavia decides to lower taxes to increase consumption thru use of consumer’s marginal propensity to consume, and the economy in general thru the multiplier effect, it will increase the aggregate demand for goods and services. Marginal propensity to consume is the idea that that consumers will spend more money if they have more, but increases in income do not lead to equal increases in consumption because people save some of the money.
This essay indicates that financial aid by the unemployment insurance that comes from the parliament, is one way to resolve the depression, make the economy develop faster and reduce crimes in the country. These subsidies that the government gives to unemployment basically come from workers’ taxes and incomes of the country. The benefits on spending subsidies benefits for unemployment have more outweigh. Hence, the government should focus on impacts to reduce the level of unemployment. In contrast, there have negative results on distributing wages, it leads to inequity between employed and unemployed workers, and it may creates incompetent workers.
Tax cuts are only benefiting the richest people, and will widen the inequality gap between the rich and the poor. A recent report from the Congressional Research Service states, “as the top tax rates a... ... middle of paper ... ...ot let this inequality gap continues to rise; therefore, the government needs to tax heavily onto the rich people, and redistribute their money to the poor. If income inequality continues to grow, the economy will break down. For example, if the housing price continues to rise because of the rich people, poor people will not have a place to live since they cannot afford to buy these expensive houses. When this happens, it will create another housing bubble because the houses are not worth buying, which means the market value of the house exceeds the house’s value; therefore, nobody will buy the house including the riches since they already have houses to live.
An increase in tax tends to cut in production quantity and leave an adverse effect on producers’ as well as consumers’ pocket. If it happens, he starts to reduce his expenditure which again leads to reduction in production of goods and services due to this unemployment takes place in the economy and a cause and effect cycle generates between increase in CPI and decrease in
These problems may include the loss of real output(real GDP) as the economy has unused labor so its producing inside the PPC curve, a loss of tax revenue for the government as unemployed people don’t pay taxes and this is also followed by costs to the government for unemployment benefits which it provides for unemployed people. The main point is how to fix stagflation. Fixing this economical problem has many different methods according to different economists, but one method which has proved to be effective is increasing the interest rates to a point where borrowing money would be practically impossible therefore taking the country into