final paper

Running head: UNEMPLOYMENT AND INFLATION 1

Unemployment and Inflation 2

Unemployment and Inflation

Phoenicia Florez

ECO 203 – Principles of Macroeconomics

Ashford University

Doctor Kunsoo Choi

March 25, 2019

The two most important macroeconomic issues the economy faces is unemployment and inflation. These issues are usually kept in check due to the federal government’s fiscal policy and the Federal Reserve’s monetary policy which both try to help the economy maintain a low unemployment rate around a natural rate and a low inflation rate around two percent. In order to understand the relationship between the two more clearly, there are many factors that one would need to study to gain clarity.

The short run and the long run relationship between unemployment and inflation differs in that the short run shows there is a correlation between the two. The long run shows that there is a median rate of unemployment which is equivalent to about five percent. The short run curve shows as an L figure, whereas the median five percent unemployment rate is steady. The Phillips curve is important because the economy is always reflecting the short run curve and the peaks and valleys of the economy. The Keynesian view was further solidified when the Phillips curve came about because it supported the theory that aggregate demand led to lower unemployment rates. In the end, the rate becomes vertical and any slight fluctuations adjust naturally. In the long run, increase and decrease don’t lead to the same outcome as it would in the short run.

The 20 year unemployment and inflation data does reflect the short term Phillips curve. It has peaks and valleys that balance each other out. The highest point of unemployment showed as 9.8 in 1982 and a low of 2.2 in 1953 making it a median of five percent unemployment directly correlating with inflation. This also allows the government to decide when they need to work on the monetary and fiscal policies. This data would let the government know when it would be a good time to intervene and stimulate the economy so that we can get out of our low valleys or stabilize our highs. When we have high unemployment rates, we will have less people spending money and higher rates so the government would need to decide how they will distribute money into the economy to keep money circulating even if hard times have fallen. The government can also decide if they want to keep interest rates low and allow the economy to continue recovering from the most recent peak in unemployment.

The recent 20 year unemployment and inflation data proves that we constantly cycle in and out of the Philips short run curve, but it also proves that there is a median of five percent that, if left unassisted, the economy does reach a state of equilibrium. With the data, the government can use that information to decide on the prime time to intervene and keep the economy stable. The short run curve also supports the fact that while there is high inflation and a need for labor, the economy meets that demand by working longer hours for the benefit of higher pay. In the long run, the short term curve of inflation and unemployment impacting each other seems nonexistent. It was said by Friedman that the two didn’t affect each other as substantially as it did during the short run. It shows that with high fluctuations come higher unemployment rates but in the bigger picture, there were hardly such extreme highs and lows that the economy felt.

The Phillips curve can still help resolve todays issues even with all of the idiosyncrasies that are presented between the short run and long run theories. The Keynesian view believes that the Phillip’s curve can help the government determine when to intervene and when to stimulate the economy so that we can get back to our natural level. It can also be used in the short term to better gauge the ever fluctuating economy so that one can determine what to do with their money in the interim time. They can see that the economy is rising in inflation and will fluctuate in unemployment so they can determine if that’s the best time to make any money decisions or to wait out the tough part. The long term Phillips curve can also help the government to identify trends and inversely create more tax breaks, lower interest rates, buy bonds or change the bank reserves. It might not fix all of the problems, but it can give us two different views on the current state of the economy, what it might lead to, and what has worked well in the past to boost the economy and get it out of the slump.

As a policy maker, when I saw that the unemployment rates were rising, I would give tax breaks to those who have been laid off or let go due to not enough demand. I would also allow them to qualify for programs in which they can temporarily be reprieved of taxes and fees in their normal bills, but have the option to pay them back on a payment plan once they become stable again. I would also instill programs that allow you to pay additional amounts of money per month so that the person may be eligible to skip a payment on their rent or mortgage when they are scraping by or in need. If they do not use it, then they get the money back at the end of the term or lease agreement. I would also allow them to temporarily qualify for food stamps and give them the option to pay it back when they become employed by automatic check deduction. I would also offer them the option to discuss their situation with a financial counselor so that they can continue making the best moves with their money while they are low on funds. All of this could be repaid now, while they get a job again, or in the end from their social security. The last thing I would encourage would be that employers offer certain types of benefits that would allow those that need to be let go to qualify for some type of business assistance fund from their previous employer so that they can remain afloat.

Although all of these policies and graphs can help us determine what direction our economy is going, it is always most important that we have law makers and policies that try to instill safety nets while the economy is stable so that when the economy is shaky, the citizens don’t suffer. We cannot always truly decide how all of the money is spent and we cannot always advocate for how the economy is treated but we can take precautions and do our due diligence to plan ahead and endorse policies that will benefit our economy in the hard times that may lie ahead. Even if we don’t feel the heavy burden of the economy right now, it would be in our best interest to create safety nets so that when the economy is strained, we wont rely on the government to lessen the burden and stimulate the economy.

References

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