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.
Because the firms ¡°cut back and produce less¡± when they experience recessions, they will employ fewer workers. Therefore, the unemployment rate rises. This increase in unemployment caused by recessions and depressions is called cyclical unemployment. Recessions cause social consequences. During the recessions, the unemployed suffers a lot.
The classical theory analyzed by Pigou (1993) and Solow (1981) argues that the labor market consists of demand and supply of labor. The demand curve is a negative function of real wage in that if wages increase, the quantity demanded for labor will decline and the opposite is correct. Because one is employed does not mean that others are not unemployed. Cheaper labor to entrepreneurs is the most effective way to reduce unemployment. Technological advancements will cause a rise in the number of unemployed but these unemployed will also search for other jobs but this search is likely to reduce wages.
Seasonal unemployment occurs when a person is unemployed or their profession is not in demand during a particular season. On the contrary, cyclical unemployment occurs when there is less demand for goods and services in the market so consequently supply needs to be decreased. There are a multitudinous number of both economic and social difficulties associated with unemployment. One fundamental reason why the government particularly stresses on reducing unemployment levels is as a result it poses a great cost on the economy. Not only does it affect the economy, but also it poses a great threat towards the living standards of the unemployed people itself.
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.
One trend exhibited by businesses to recent economic condition is price wars. The prevailing economic conditions have led to consumers spending and demanding fewer products which in turn results in reduced sales for businesses (Li, 2008). Businesses are involved in price wars in an attempt to attract customers and maintain their sales levels. Since the economy has resulted in reduced demand for products it means that Apple will have reduced sales. Other effect of recession on business includes increased risks and also businesses looking into new methods to cut down on c... ... middle of paper ... ...e it has strengths major strengths that include a strong brand known for innovation and quality.
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.
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.
Those who are in debt end up in worst conditions because the demands of goods and services fall. This results in further depression of unemployment and a vortex of problems. The effects of deflation are much more unpredictable than inflation and often come as a surprise (text, Ch. 12-2h). On the surface level, deflation may be seen as a positive considering the decreased price levels, but it will result in a depression of problems for those in debt.
Has the Fed lowered long-term US growth expectations? Lacklustre Productivity Produces Stagnant Economy? I have periodically commented on the view held in some circles that US potential GDP growth has stagnated, due to a combination of real and monetary factors. The important real factor is productivity, because it is crucial in linking economic growth to employment. In the UK, for example, productivity growth since the Great Recession has been appalling, but it helps to explain the faster-than-expected declines in unemployment, as well as the below-par recovery in corporate profitability.