Professional Documents
Culture Documents
Inflation and Unemployment
Inflation and Unemployment
A2 Economics
Content
The causes and consequences of unemployment The natural rate of unemployment hypothesis The phillips curve The causes and consequences of inflation
Unemployment
There are a number of types of unemployment:
Structural unemployment Cyclical unemployment Frictional unemployment
Structural unemployment occurs when the economy changes and industries die out Training is needed to give the unemployed workers new skills
Unemployment
Cyclical unemployment is caused by the business cycle Frictional unemployment is caused when people are temporarily out of work as they are moving jobs
Unemployment and AD / AS
As Aggregate demand increases unemployment will decrease Supply side policies can be used to increase aggregate supply in the economy and thereby reduce the level of unemployment However if the growth in the level of aggregate demand is less than the underlying trend growth in output unemployment is likely to occur
Effects of Unemployment
On an individual level unemployment reduces the level of income that an individual earns As their income has been reduced consumption also reduces as they pay for necessities rather than luxuries Goods that are income elastic will be consumed less Quality of life will be reduced for the unemployed worker Workers may become discouraged and give up searching for jobs becoming part of the long term structural unemployment in the UK
Effects of Unemployment
Unemployment can have significance effects on the performance of the economy as a whole The effects are most marked due to long terms unemployment If there is unemployment in the economy resources are not being used effectively and the economy will be operating below any points on the PPF curve
Phillips Curve
Inflation
Inflation- The rise in the general level of prices In the long term, inflation erodes consumer purchasing power. That means that accumulated wealth buys less and less, with the passage of time. Where there is high inflation it is difficult for businesses to plan for the future as there is uncertainty regarding the cost of raw materials
Preventing inflation
One of the best ways to prevent inflation is through stock, variable annuities, and variable universal life insurance. These alternatives provide the potential for returns that exceed inflation over the long term. Central banks place high interest rates using unemployment and the decline of production to prevent price increases.
Summary
There are three main types of unemployment:
Structural Cyclical Frictional
Unemployment means that an economy cant operate on its ppf As AD increases unemployment decreases The natural rate of unemployment recognises there will always be some level of unemployment in the economy The Phillips curve shows an inverse relationship between unemployment and inflation Inflation is a rise in the general level of prices There are two causes of inflation:
Cost push Demand pull