Unemployment and Inflation

“Unemployment and Inflation” Please respond to the following:

  • Imagine that you have a fixed 30-year interest rate for your mortgage, and the economy has experienced unanticipated inflation. Examine who the winner and loser would be. Is it the borrower or the lender in the given scenario? Provide support for your response.

Unemployment and Inflation Overview

The trade-off between inflation and unemployment was first reported by A. W. Phillips in 1958—and so has been christened the Phillips curve. The simple intuition behind this trade-off is that as unemployment falls, workers are empowered to push for higher wages. Firms try to pass these higher wage costs on to consumers, resulting in higher prices and an inflationary buildup in the economy. The trade-off suggested by the Phillips curve implies that policymakers can target low inflation rates or low unemployment, but not both. During the 1960s, monetarists emphasized price stability (low inflation), while Keynesians more often emphasized job creation.

The experience of so-called stagflation in the 1970s, with simultaneously high rates of both inflation and unemployment, began to discredit the idea of a stable trade-off between the two. In place of the Phillips curve, many economists began to posit a ”natural rate of unemployment.“ If unemployment were to fall below this ”natural“ rate, however slightly, inflation would begin to accelerate. Under the ”natural rate of unem-ployment“ theory (also called the Non-Accelerating Inflation Rate of Unemployment, or NAIRU), instead of choosing between higher unemployment and higher inflation, policymakers were told to focus on ensuring that the economy remained at its ”natural“ rate: the challenge was to accurately estimate its level and to steer the economy toward growth rates that maintain price stability, no matter what the corresponding level of unemployment…

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