Principle 10: Around the World

Principle 10: Society faces a short run tradeoff between inflation and unemployment

In the short run, an increase in the quantity of money stimulates spending, which raises both prices and production. The increase in production requires more hiring, which reduces unemployment. Thus, in the short run, an increase in inflation tends to reduce unemployment, causing a trade-off between inflation and unemployment. The trade-off is temporary but can last for a year or two. Understanding this trade-off is important for understanding the fluctuations in economic activity known as the business cycle. In the short run, policy makers may be able to affect the mix of inflation and unemployment by changing government spending, taxes, and the quantity of money.

Although a higher level of prices is, in the long run, the primary effect of increasing the quantity of money, the short-run story is more complex and controversial. Most economists describe the short-run effects of monetary injections as follows:

•        Increasing the amount of money in the economy stimulates the overall level of spending and thus the demand for goods and services.

•        Higher demand may over time cause firms to raise their prices, but in the meantime, it also encourages them to hire more workers and produce a larger quantity of goods and services.

•        More hiring means lower unemployment.

This line of reasoning leads to one final economy-wide trade-off: a short-run tradeoff between inflation and unemployment. Although some economists still question these ideas, most accept that society faces a short-run trade-off between inflation and unemployment. This simply means that, over a period of a year or two, many economic policies push inflation and unemployment in opposite directions. Policymakers face this trade-off regardless of whether inflation and unemployment both start out at high levels (as they were in the early 1980s), at low levels (as they were in the late 1990s), or someplace in between. This short-run trade-off plays a key role in the analysis of the business cycle—the irregular and largely unpredictable fluctuations in economic activity, as measured by the production of goods and services or the number of people employed. All such subject and varied topics are covered in Accounting Homework help, Assignment help at Transtutors.com.

Society Faces a Short-Run Trade Off between Inflation and Unemployment

The tenth economic principle suggested by Mankiw is "Society Faces a Short-Run Trade Off between Inflation and Unemployment." Now, what does this really mean? What trade off?

In the society that we live in, we continuously purchase goods, and behind all purchase exists the demand for each goods. The need and demand for such goods acts as the determinant of inflation, and it is the policy-makers' and economists' role to set up a bound for inflation so that the inflation rate of 2-4% is maintained.

Additionally, not all people have the equal purchasing powers as others do, and not everyone is employed as others are. In the perspective of an economist or a policy-maker, the lower the unemployment rate, the better, and people have been single-handedly working on abating the degree of unemployment to facilitate the general welfare of the country.

In the perspective of a policy-maker, simply printing more money so the general economy of a nation is facilitated would be a wonderful option; people, then, would be encouraged to spend more and as the people spend more, the companies and manufacturers would be inspired to produce more. This means there is less economic regulation put, and unemployment rate would be reduced. Essentially, the general economy is risen. However, because more money has been printed, the inflation rate would go up, risking the economy in its entirety.

This dilemma of choosing to either enhance the state of inflation or unemployment - thus facing a trade off - has been a continuous problem for policy-makers and economists for a long time. Here in this blog, we will be discussing further on this dilemma and real examples regarding the principle.