Unemployment and inflation

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Most individuals probably understand the economic concepts of unemployment and inflation. Unemployment reflects the number of people out of work who are actively seeking work, and inflation indicates an overall rise in the price level of most, but not all, goods and services. These readings and activities will give you a deeper look at these concepts, as well as their interrelationship.

Consider first that inflation erodes the purchasing power of the dollar - or any other monetary unit, like the euro, yen, or pound. By distinguishing between nominal income, or the actual amount of money, and real income, or the amount of goods and services it can buy, macroeconomics helps measure the effects that inflation has on an economy and on its constituents' standards of living. Second, consider some details about unemployment. There is the labor force, which includes both the employed and unemployed, or those able and willing to work but not currently working, and those not in the labor force, including full time students, nonworking spouses, and retirees. Third, adding another layer of evolving depth, we will define and describe three types of unemployment: frictional unemployment (or temporary unemployment); structural unemployment (affecting whole sectors of the economy); and cyclical unemployment (caused by downturns in the economy).

To better understand the interrelationship between unemployment and inflation consider the following unlikely event. Suppose everyone who was seeking a job got one tomorrow, began earning income, and spent their income. As it would take longer for the products to arrive in retail stores, there would be a lot of money chasing a few goods. Consequently, unemployment would fall and the overall price level would rise. Gaining further depth in the progression of this course, the differences between our expectations for inflation and our observations of it tend to reinforce the notion that expectations play a large role in macroeconomics.

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Upon successful completion, you will be able to:

  • define unemployment rate;
  • calculate the unemployment rate;
  • identify and distinguish between the different forms of unemployment;
  • analyze the problems associated with the unemployment rate;
  • describe the three types of unemployment and factors that relate to them;
  • define inflation and deflation, and explain how each affects the price and economic growth of an economy;
  • define, interpret, and calculate inflation rate and the consumer price index;
  • describe the problems and biases associated with the consumer price index;
  • articulate sources of inflation, and explain how they can affect economic stability;
  • use the model of aggregate demand and aggregate supply to explain stagflation;
  • explain the relationship between inflation and unemployment;
  • describe and analyze the Classical as well as the Keynesian views on unemployment; and
  • discuss various explanations for wage and price stickiness.