Answer to Question #12217 in Macroeconomics for sandy
are unemployment and inflation adequate indicators of the economic health of the nation
Inflation and unemployment have an inverse relationship, so an increase in unemployment will reduce the inflation rate. It is possible for a nation to have high unemployment and high inflation at the same time because of factors such as oil prices, which is a situation known as stagflation. Central banks set an acceptable level of inflation. To reduce inflation, they will reduce the amount of money available for businesses to borrow if the unemployment rate gets too low.
Inflation increases the cost of all items sold on the market, including the cost of hiring an additional worker. When inflation increases, workers demand higher wages from employers. The employer will have to meet these expectations and raise wages if unemployment is low. Additionally, he must increase product costs to cover these rising expenses. This situation creates a self-reinforcing inflationary spiral where store prices lead to wage increases, and wage increases lead to higher store prices.
When unemployment is high, the cost of goods at the store will still increase during an inflationary period, but the employer will be able to hire cheaper workers if the current workers complain. Wages will not rise while unemployment remains high. Workers will have to borrow money or reduce the amount of goods they purchase. If workers cannot get loans, stores will have to lower prices to continue to sell products, reducing inflation.
So unemployment and inflation are adequate indicators of the economic health of the nation.