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Answer to Question #12217 in Macroeconomics for sandy

Question #12217
are unemployment and inflation adequate indicators of the economic health of the nation
Expert's answer
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.

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