Answer to Question #79822 in Macroeconomics for Issac

Question

May I ask how does a low unemployment affect the other macroeconomic objectives?
Also, may I ask what are the demand and supply-side suggestions for a low inflation rate?

Answer 1

May I ask how does a low unemployment affect the other macroeconomic objectives?
This is the classic conflict in economic theory. If a government tries to reduce unemployment through reflationary measures, such as lower interest rates or increased public spending, then the resulting reduction in unemployment will push wages higher (as employers try to attract workers from a diminishing pool of the unemployed). This will lead to higher prices. On the other hand, when the government tries to control high inflation with higher interest rates and reduced spending, the resulting reduced consumer spending and lower investment will result in job losses. Norman Lamont, Conservative Chancellor of the early 90s, famously said '...unemployment is the price worth paying for lower inflation.'

Also, may I ask what are the demand and supply-side suggestions for a low inflation rate?
The most effective way to reduce the demand- side inflation is by reducing the supply of money in the economy through monetary policy which will reduce the purchasing power of the people and hence the demand will fall further reducing the prices of goods and services.
Supply-side inflation when the cost of production of a good or service increases, it becomes expensive for the producers to produce goods and services and as a result they transfer this burden of rise in the cost of production to the customers by increasing the prices of goods and services. Thus, causing inflation.
The various causes which lead to cost-push inflation are-
• Increase in the prices of raw materials.
• Increase in taxes like VAT and excise duties.
• Increasing the amount of wages and salaries to workers.
How to reduce supply-side inflation?
• Providing better education and training to the workforce which increases the supply.
• Adopting measures to carry out cost-effective production.