Thinking about the Economic impact of unemployment and inflation, why should we expect an inverse relationship (where one goes up and the other goes down) between these statistics?
Thinking about the Economic impact of
The unemployment and the inflation are the two social evil that every economy wishes to reduce and eliminate from them. The unemployment is caused when the economy tries to reduce the inflation in the economy. The fiscal policy should be contractionary in order to reduce the inflation. As the inflation decreases due to fall in money supply, the demand will fall and the fall in demand reflects the fall in the inflation in the economy. But as the demand falls, it leads to fall in output that leads to reduction in employment.
When the government gives focus to the reduction of unemployment in the economy, it should increase the money supply through the policies that increases the money supply in the economy. thus, the government should pursue the expansionary fiscal policy which reduces the tax rates and increases the disposable income of the economy. as the money supply increases, people will demand more goods and services and the higher demand in the economy leads to higher demand for labor and reduces the unemployment rate. But while the money supply increases in the economy in this process, it leads to inflation in the economy.
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