inflation (1 Viewer)

[sukiyaki]

this maybe be a simple question,
my teacher keeps mentioning how if you look after inflation, unemployment will look after it self...

but how exactly?

 

[TastesGoodBut]

well... basically in hte long run, the inverse relationship/tradeoff between inflation and unemployment ceases to exist

look in your text books at the Short Run Philips Curve, and the Long Run Philips Curve adn that should explain it all...


EDIT - im sure there is also probably some other reason... like if firms/employers are not worried about inflation they dont have to worry about hiring more staff or sumthing like that as well...

 

[sukiyaki]

thanks tastegoodbut, i see the trade off but im thinking
what would happen if you look after uemployment first instead of inflation?

 

[Nick]

well if the RBA/Govt keep inflation at a good level, then Australia should still experience growth and good levels of employment..

thats why hte RBA adopted inflation targetting, and pretty much abandoned their supposed goal of full employment.

 

[saves.the.day]

Dont really know but wouldn't there be more disposable income so more demand and growth and unemployment would get better and better which means more and more demand causing short run increases in inflation. Using this logic, I guess you could say if you keep reducing unemployment, then the long run impact would be hella lot of inflation.

 

[sukiyaki]

okay thats clear things a bit,

thanks ^^

 

[timmii]

I'll type you out something from my textbook:

"the natural rate hypothesis states that in the long run the economy tends towards the natural rate of unemployment. This natural rate is largely independent of the level of aggregate demand stimulus provided by monetary or fiscal policy, Policy-makers may be able to push the economy beyond its natural (or potential) rate of unemployment, temporarily...resulting in a higher price level. The natural rate hypothesis implies that regardless of policy-makers concerns about unemployment, the policy that results in low inflation is generally going to be the optimal policy in the long run"

- Crompton P, Swain M, Hopkins S, McEacherns W (2002), "Macroeconomics - a contemporary introduction"; Thomson, Victoria.