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Chapter 1: Q10. (page 17)

How are inflation and unemployment related in the short run?

Short Answer

Expert verified

Inflation and unemployment are negatively related in the short run.

Step by step solution

01

Inflation and unemployment

Inflation refers to increasing prices as an economy progresses. Unemployment refers to the unused potential of the country in terms of human resources.The two factors are growth indicators of an economy.

02

Relation between inflation and unemployment  in the short run

In the short run, inflation and unemployment are inversely related. This can be understood by the effect of an increase in aggregate demand. Higher aggregate demand leads to higher prices (inflation) as too much money is chasing few goods; these high prices encourage firms to increase their production and employ more people鈥攖he increase in hiring leads to a low unemployment level. Thus, higher inflation comes with a lower unemployment level.The Phillips curve gives this relationship.

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Most popular questions from this chapter

Explain whether each of the following government activities is motivated by concern about equality or a concern about efficiency. In the case of efficiency discuss the type of market failure involved.

  1. Regulating cable TV prices
  2. Providing some poor people with vouchers that can be used to buy food
  3. Prohibiting smoking in public places
  4. Breaking up standard oil (which once owned 90 percent of all U.S. oil refineries) into several smaller companies
  5. Imposing higher personal income tax rate on people with higher incomes.
  6. Enacting laws against driving while intoxicated

Discuss each one of the following from the standpoints of equality and efficiency.

  1. 鈥淓veryone in the society should be guaranteed the best healthcare possible.鈥�
  2. When workers are laid off, they should be able to collect unemployment benefits until they find a new job.鈥�

Why is productivity important?

If a nation has high and persistent inflation, the most likely explanation is

A. the central bank creating excessive amounts of money.

B. unions bargaining for excessively high wages.

C. the government imposing excessive levels of taxation.

D. firms using their monopoly power to enforce excessive price hikes.

What is scarcity? Can you think of two causes of scarcity?
See all solutions

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