Inflation Vs Unemployment

Inflation vs. Unemployment

When inflation and unemployment are added together they produce the Misery index, which purports to measure the health of the economy. We would like to see how these two measures of economic performance are related to each other. It is known that in the long-run, inflation and unemployment are largely unrelated problems yet in the short-run we see the exact opposite. Unfortunately, in nowadays society it is common knowledge amongst people to expect an increased unemployment rate. Upon completing this research, we would be able analyze how the government uses inflation and other factors to influence the unemployment rate.

        Our society faces a short-run trade-off between inflation and unemployment. This can be seen by looking at the Phillips Curve, where years with low unemployment tend to have highly inflation and vice-versa. Low unemployment was associated with high aggregate demand, which causes upward pressure on wages and prices throughout the economy. Our main goal is to understand how unemployment, change in GDP, change in government expenditures and the federal funds rate as of 1955 up until 2008, affect the economy and predict future expected inflation rates.

        Economic development greatly depends on inflation and unemployment, which have a negative relationship. They show the level of growth through the changes in GDP, monetary and fiscal policy. By being able to predict the future expected inflation rates, we can avoid the rise of cyclical unemployment. Using regression analysis, we will be able to predict the expected inflation rates.

As we know, the unemployment rate increases once the level of full employment decreases. Inflation is the overall increase in price level, which is caused by the excess demand, increase in costs of production, and decrease in supply. One implication of this for government policy was that governments could control unemployment and inflation with a Keynesian policy which is consistent with our current fiscal policy where the government uses expenditure and revenue collection to influence the economy. Fiscal policy can be contrasted with the other main type of macroeconomic policy, monetary policy, which attempts to stabilize the economy by controlling interest rates and the money supply. The two main instruments of fiscal policy are government expenditure and taxation which is why we included a measure of our fiscal policy into our research. Changes in the level and composition of taxation and government spending can impact on the following variables in the economy.

Fiscal policy is changes in the taxing and federal government expenditures in order to expand the level of aggregate demand; in a recession, it lowers taxes and increases government spending, which requires deficit spending. An increase in government expenditures leads to an increase in the GDP. It is believed that in the long-run, an increase in income can lead to an increase in consumption and savings, which can also lead to an increase in demand for goods and services, but if savings decrease, then the supply of labor will most likely decrease. Basically, in the short-run, there is no inflation to be expected. Monetary policy is changes in interest rates and money supply to expand aggregate demand; in a recession, the Federal Reserve lowers the interest rates and increases the money supply. When the value of the US dollar depreciates, the overall price is raised.