Unemployment is defined as 'People willing and able to work at the current rate of pay but who are unable to find a job'. There are a number of types of unemployment, including structural, cyclical, seasonal and frictional unemployment. Unemployment is a key measure of economic performance. Decreased unemployment is generally associated with rising gross domestic product (GDP), higher wages and higher industrial output. The main question, which is usually kept silent 'how to reduce unemployment?', this essay explains that the government can achieve a lower unemployment rate through expansionary fiscal or monetary policy, so it could be assumed that policymakers would consistently target a lower unemployment rate through these policies.
Inflation refers to a general increase in prices. The opposite is deflation, a general fall in price levels. In general, economists have found that if the unemployment rate falls below a certain level, known as the natural rate, inflation will tend to rise and continue to rise until the unemployment rate returns to its natural rate.
Alternatively, if the unemployment rate is higher than the natural rate, the inflation rate will tend to slow down. The natural unemployment rate is the level of unemployment consistent with sustainable economic growth. Unemployment below the natural rate suggests that the economy is growing faster than its maximum sustainable rate, which puts upward pressure on wages and prices in general, leading to higher inflation. The opposite is true if the unemployment rate rises above the natural rate, the downward pressure on wages and prices generally leads to a decline in inflation. Wages make up a significant portion of the cost of goods and services, and therefore upward or downward pressure on wages pushes average prices in the same direction.
The Phillips Curve is a graphical representation of the inverse relationship between the rate of inflation and the rate of unemployment in an economy. Developed by A.W. Phillips in the 1950s, this curve has been a subject of much debate and discussion in the field of economics. One of the key ideas behind the Phillips Curve is that there is a trade-off between inflation and unemployment. This means that as the rate of unemployment decreases, the rate of inflation will increase, and vice versa. In the context of reducing unemployment, the Phillips Curve suggests that governments can use monetary and fiscal policy to influence the rate of unemployment. For example, by increasing government spending or lowering taxes, governments can stimulate economic growth and create jobs, which in turn will reduce the rate of unemployment. However, this can also lead to an increase in the rate of inflation, which is the trade-off that the Phillips Curve describes.
Overall, there are possible ways for government to reduce the level of unemployment. And the main policy to achieve a low inflation rate is monetary policy to raise interest rates, which reduces demand and helps to bring inflation under control. Other policies to reduce inflation may include tight fiscal policy (higher tax), supply-side policies, wage control, exchange rate appreciation, and money supply control (a form of monetary policy).
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