3Effects of inflation, deflation and unemployment in an economy
Effects of Inflation, Deflation and Unemployment in an Economy
Answer Questions for Chapter 30 and 31
Unemployment and Labor Force Participation
Given that the unemployment rate is a function of the labor force participation rate, a government policy that tends to increase the retirement age will have a significant influence on this case. In this regard, the level of unemployment will have to increase since the senior citizens are not giving opportunities for the young employees to get employed in time and consequently, the number of youths who are jobless keeps rising.
In most cases, unions are involved in bargaining for the employees’ welfare and more so salary and wages. When the wages and salaries for the employees are raised, this impacts negatively on the way the firm can absorb more workers (Cowen & Tabarrok, 2012, p. 323). The amount of money that could have been paid to cater for the influx of new workers is spent on the already existing workforce as shown by both supply and demand curves below.
Indeed, there is a common difference between the actual rate of unemployment and the natural one. For the case of natural unemployment, this has no influence on the country’s economy unlike in the other circumstances. In the event of the actual unemployment rate, the stability of the country’s economy can either reduce or increase the rate depending on the level of the stability. In this perspective, a country with a better economy will have fewer chances of actual rate and vice versa.
Inflation and the Quantity Theory of Money
The effect of inflation reflects much on the level of the stability of the country’s economy. Notably, this stability depends on the country’s means of production as to whether they are profitable or not. In the case that they are not lucrative as it would have been expected, this will lead to inflation. Therefore, the country will have more money circulating in the economy than the available services and commodities that can be purchased using the same money. Inflation can therefore not be prevented by the reduction in the rate of which money are being printed.
In the times of inflation, lenders go at a loss while the borrowers embrace the profit gained from this circumstance. The amount of money that the borrower refunds the lender is not worth because of the situation at hand (Cowen & Tabarrok, 2012, p. 323). On the contrary, the moments of deflation works negative to the borrower as the values of money that they return to the lender has more worth at this time than it was at the time when the borrowing and lending took place.
Cowen, T. & Tabarrok, A., 2012. CourseSmart International E-Book for Modern Principles of Economics. 1st Ed. New York: Palgrave Macmillan.