Economics
(a) Explain whether there is a relationship between inflation and unemployment. Should government interfere and reduce inflation and unemployment? Provide real life examples. (5 marks)
(b) Using your home country as a case study outline and analyze inflation, unemployment and growth trends. Identify what range of the aggregate supply curve your country is operating in. (15 marks)
(c) For your case study explain inflation, unemployment and GDP using AD-AS (5 marks)
a)
Inflation is the sustained overall or average increase in the price of goods and services over a period of time. With every rise in the price then each unit of currency buys fewer goods and services, which can also defined as “inflation reflects the reduction in the purchasing power per unit of money”. This increase in price or the decrease of purchasing power is measured by a price index called as the consumer price index. Inflation has a negative and a positive effect on the economy. Negative effects include the increase in the opportunity cost, unemployment, discouragement of investment and savings, and shortage of goods. Positive effects include the reserve bank adjust their real interest rates and encourage investment in non-monetary capital projects. However the economics in today’s time believe that an economy is said to be in a favorable and a stable condition only if the inflation rate is steady or favorably low(as compared to zero or negative). Most of the most developed countries have managed sustain an inflation rate of 2-3%. Inflation generally occurs due to two policies:
• Demand pull inflation: this occurs when the demand for goods and services is greater than the supply or we can also say when too much money is chasing too few goods.
• Cost pull inflation: when the cost of a commodity or service goes up then the need to increase profit occurs. The cost is dependent on wages, taxes, and increased cost of inputs.
Unemployment is a state when an
(b) Using your home country as a case study outline and analyze inflation, unemployment and growth trends. Identify what range of the aggregate supply curve your country is operating in. (15 marks)
(c) For your case study explain inflation, unemployment and GDP using AD-AS (5 marks)
a)
Inflation is the sustained overall or average increase in the price of goods and services over a period of time. With every rise in the price then each unit of currency buys fewer goods and services, which can also defined as “inflation reflects the reduction in the purchasing power per unit of money”. This increase in price or the decrease of purchasing power is measured by a price index called as the consumer price index. Inflation has a negative and a positive effect on the economy. Negative effects include the increase in the opportunity cost, unemployment, discouragement of investment and savings, and shortage of goods. Positive effects include the reserve bank adjust their real interest rates and encourage investment in non-monetary capital projects. However the economics in today’s time believe that an economy is said to be in a favorable and a stable condition only if the inflation rate is steady or favorably low(as compared to zero or negative). Most of the most developed countries have managed sustain an inflation rate of 2-3%. Inflation generally occurs due to two policies:
• Demand pull inflation: this occurs when the demand for goods and services is greater than the supply or we can also say when too much money is chasing too few goods.
• Cost pull inflation: when the cost of a commodity or service goes up then the need to increase profit occurs. The cost is dependent on wages, taxes, and increased cost of inputs.
Unemployment is a state when an