ECONOMICS

How would you explain a simultaneous rise in unemployment and prices in an economy

Economics

How would you explain a simultaneous rise in unemployment and prices in an economy?

When rise in unemployment and prices occur simultaneously in an economy the situation is known as Stagflation. The term “stagflation” refers to an economic condition of both stagnant business action and continuing inflation, together with an increasing rate of unemployment - describe as the new economic depression. It increases the problem for economic policy since activities intended to lower inflation might aggravate unemployment and vice versa.

Managing the level of inflation and attaining near to full employment are both key objectives of macroeconomic policy which governments attempt to attain. Stagflation is a period when there is a persevering ascent in prices and slow economic development. Slow economic growth means that there is an ascent in unemployment as the economy is not functioning at its complete potential. As an element of their goals, governments intend to lower unemployment and attempt to keep prices constant. However when there is stagflation, differences have a tendency to take place as policies planning to lower inflation can cause output to further drop. It is evaluated here the causes for such an event incident and what governments can do to solve such issues, referring to current economic incidents.

Governments are usually happy when the level of inflation is low. Inflation could be linked with general business optimism and high profits. Powell (2009) contends that this "possibly a fundamental result of expansionary policies to unemployment." Although when rate of inflation are unanticipated and goes uncontrollable, the inflation cost comes to be more obvious. Rapid changes in costs direct to cash-functions being missing and bargaining initiates to reinstate transactions. Standard economic behavior is deformed as well as purchases are carried forward if they anticipate that inflation will augment further. As stated above unemployment is believed to be bad for an economy. This is the reason governments attempt to implement strategies to evade these two issues from happening.

Why unemployment and prices rise simultaneously in an economy

There are numerous speculations regarding why stagflation takes place. Some of the main theories are those put forward by Keynesian, supply side economist and monetarist. Keynesian economists hold responsible supply shocks as the reason of stagflation. They refer to surging cost of energy or surging costs of food, for instance, as the reason for economic problems. Monetarists refer to excessively rapid development in the money supply for creating an excessive amount of dollars to pursue excessively few products (Blinder, & Rudd, 2012).

Supply-siders hold responsible high taxes, undue regulation of organizations and a determined welfare state that facilitates individuals to live well without meeting expectations. Still other scholars contend that stagflation is essentially a natural element of the business cycle in advanced economies or that social structure or governmental issues are to blame. The inadequacy to predict, evade, and control stagflation as it shows up and disappears in different parts of the worldwide economy propose that the factual response may not ...