Unemployment and Inflation Essay Example | Topics and Well Written Essays - 500 words

Unemployment and Inflation - Essay Example During inflation, the government must come up with various fiscal and monetary measures to redeem the situation. Thus unemployment and inflation are usually correlated. As the level of unemployment reduces, firms will spend more on salaries leading to high costs in production. These high costs are then passed to the final consumers in the economy in form of high price commodity generating inflationary measures in the economy (Gordon, & Solow, 2004). While the opposite is also true. As unemployment increases, workers will demand fewer wages that will lower the production costs. This is then passed inform of low prices to the consumers leading to reduced inflation. From the institution above, the correlation between unemployment and inflation is the inverse relationship. As one increases the other reduces and vice-versa. This implies that the economy can only achieve one at a time but not both be leading to a trade-off as shown below. The diagram above represents the tradeoff that exis ts between unemployment and inflation rate. The economy can either do with a high inflation rate say 8% and a low unemployment rate of 3%. They can also do with a low inflation of 4% and a high unemployment rate of 6%. This is an economically proved situation in many countries and I totally agree with the correlation. Laborers always demand high wages in return for the compensation of the work they do for the company. Firms also do not have much choice since they have to hire workers if they have to produce. In the process of production, they will always want to recover the costs that were used in products like the wages and costs of raw materials (Gordon, & Solow, 2004). This is passed to the final beneficiary of the commodity inform of high prices. So for firms to reduce prices they must do so at the low cost of production and one way is to minimize the use of labor. These situations results into the inverse correlation between