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Macroeconomics. Price level - Essay Example
Author : geohermann
Pages 6 (1506 words)
In the short-term view, inflation and unemployment are inversely proportional to each other. That means when unemployment is high, price level keeps low and when inflation goes high, unemployment takes a down turn. The problem with this phenomenon is that the government and the regulators of an economy would ideally want to keep both the unemployment level and inflation at as low as level possible…
Economists have noted that in long run, inflation and unemployment becomes increasingly unrelated to each other. That means a change in the unemployment seems to have little or no effect on the inflation and vice versa.
Inflation is also inversely proportional to the total consumer spending. As inflation goes up consumers are wary of spending and hold their purchases as dearly as possible. This is due to the fact that when prices rise there is also a hike in the expected price levels in the future that has an adverse effect on the consumer spending. When prices increase the consumer spending power comes down and disposable incomes are significantly lower.
When unemployment is low and there is an increase in price level, wages will rise in response to higher prices. This is because in low unemployment situation, employees can successfully demand full compensation for the higher prices. This has spiralling effect on both the wages and general input costs along with the rate of inflation. All these factors tend to leapfrog each other under low unemployment.
When unemployment is moderate, however, the employees will not be compensated in full and will have to settle for less, and so the wage costs do not rise as fast as prices when unemployment is high. ...
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