ECONOMICS

Economics



Unemployment exists in economy and deflation is occurring

In the economy, the natural rate of unemployment is 5% which can be due to several reasons like structural unemployment, frictional unemployment and seasonal unemployment. Now it is considered that the new technology has been introduced due to which the supply has been increased. The increase in supply leads to the decrease in prices as there is excess supply in the market due to innovation in the market. Deflation means the decrease in prices. As there is introduced technological innovation in the market, the prices get lower while the supply of that product is increased. As there is increase in supply but prices have been decreased, employers have to cut on their production as well as the employees so that they can still earn profits. For this reason, there will be downsizing in the company that will increase the unemployment in the economy. On the other hand, as supply increased while prices decreased, there is decrease in demand as well. The decrease in demand can be for various reasons(Lucas, 2005).

There can be a decrease in the supply of money in the economy by the government side. Similarly, there can be an increase in the amount of taxes that does not allow the household to spend. There is a possibility of decrease in the government expenditure as well that will decrease the investment in the economy. Deflation is not good for the economy. However, there are two types of deflation. One is a bad deflation that causes adverse effects on the economy. The other is a good deflation that has positive effects on the economy. If the deflation that is decrease in prices has been brought due to the innovation in the market that reduces the price of certain commodity then this deflation is considered to be a good one. However, if the decrease in prices occurs due to the fall in aggregate demand or low levels of money supply in the economy or low government expenditures then this deflation will be considered as the bad deflation that affects the economy of the respective economy severely. The classical economist approach towards the unemployment while there is deflation in the economy is there will be decrease in demand that will further decrease the employment level in the economy. As it can be seen in the graph that blue area represents the deflationary gap in the economy while Aggregate demand is falling down with prices and supply is increasing in the long run as it is a classical approach (Phelps, 2005).

Over employment exists in economy and inflation occurring

In the economy there exists over employment in the society while there is existing inflation at the same time. According to the classical approach, there is always full employment level in the society that can be achieved through market forces. When there is inflation that is increase in price of goods, the employer would want to increase its supply as ...