Sep 04 2008
The Federal Reserve and the tradeoff between unemployment and inflation
Published by Jason Welker at 8:52 pm under AD/AS Model,Fiscal Policy,Inflation,Monetary Policy,Phillips Curve,Unemployment
Federal Reserve sees slow economy, higher prices – Sep. 3, 2008
Weak aggregate demand and rising costs due to still high energy and food prices put the US economy in a tricky situation, one in which the Federal Reserve is forced to make the tough decision between tackling the unemployment problem (jobless rates have risen to 5.7%) or the inflation problem (price levels have also risen 5.7% this year, the highest inflation in 17 years).
The nation struggled with slow economic growth and still-high prices that are weighing on consumers and businesses alike…
Fed Chairman Ben Bernanke and his colleagues are all but certain to leave a key interest rate alone at 2% when they meet next on Sept. 16 and probably through the rest of this year.
Given the fragile state of the economy, the Fed isn’t in a hurry to boost rates to fend off creeping inflation. A growing number of analysts believe the economy is likely to hit another dangerous rough patch later this year as consumers and businesses curtail their spending even more.
Heading into the fall, economic activity continued to be slow, the Fed said. Businesses described the climate as “weak” or “soft” or “subdued.”
Consumers, the lifeblood of the economy, showed caution. Shoppers “concentrated on necessary items and retrenchment in discretionary spending,” the Fed observed.
In the short-run, as year 2 IB students know, society faces a trade off between high inflation and high unemployment. Rising prices and rising joblessness are both harmful to the economy, but when energy and food prices drive up the price level, while week investment and consumer spending lead lead to falling overall demand in the economy, the conditions exist where joblessness and prices can rise simultaneously. This is America’s situation at present.
The Fed must chose which problem to address. Ben Bernake, America’s central bank chief, could chose to tackle rising inflation by raising interest rates, which would discourage new investment and reduce demand for resources by firms in the economy. Investment spending by firms and consumption by households would decline, putting downward pressure on prices across the economy.
In the short-run, however, the decline in investment and consumer spending that would result from higher interest rates would exacerbate the already weak level of aggregate demand in the economy, driving unemployment even higher.
By keeping rates low, Bernanke hopes to encourage investment and consumption, which will contribute to overall demand in the economy. By encouraging new spending and investment, however, the threat that inflation will rise even more remains present.
In the trade off between unemployment and inflation, the Republican White House and the Democratic Congress made it clear that unemployment was the most important problem to address when they announced the $160 billion expansionary fiscal stimulus package earlier this year. By keeping rates at a low 2%, America’s central bank is also indicating that increasing employment is of greater importance than lowering the price level.
Discussion questions:
- Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
- Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
- “Workers’ wage gains – characterized as ‘modest’ – aren’t raising
inflation worries. Wary employers have cut jobs every month so far this
year and aren’t inclined to be overly generous in their compensation to
workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
About the author: Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course.
Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this authorRelated posts:
- You can’t always get what you want… the tradeoff between unemployment and inflation
- Unemployment and inflation: understanding the Fed’s balancing act
- Facts and the Phillips Curve: new evidence of the short-run trade-off between unemployment and inflation
- Will the Fed’s easy money policy fuel global inflation?
- IB Review – Neo-classical vs. Keynesian views of inflation
Hey Mr. Welker,
I haven't polished up on my year two economics recently, but I'm wondering how greater politics might play a role in congress' decision to focus on unemployment over inflation. The republican anti-tax stance places consumers squarely in charge of their own financial position by limiting government assistance.
In some respects it seems like allowing a degree of inflation contributes to the greater theme of individual economic independence.
I would expect that this would be a minor consideration amongst other more important economic considerations, but just a thought.
John A. Bianchi
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Although low interests do create a shift in aggregate demand, a decrease in the interest rates(also known as contractionary monetary policy) will also result in a shift out of aggregate supply. The explanation for this is as frims increase investment, they might invest in capital goods, which will result in a shift of aggregate supply.
As the philip curve states, there is a trade off between inflation and unemployment(as inflation increases unemployment decreases, and as inflation decreases unemployment increases). Therefore the government must make a decision on which one to fix, inflation or unemployment. The government for example could use expansionary fiscal policy to solve unemployment and contractionary fiscal policy to solve inflation. What is interesting is that governments usually chose to solve unemployment. The reason for this is mainly politics, the unemployed will be unhappy and will want change and to keep "the people" happy the government usually choses to solve the unemployment issue.
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Lowering interest rates has positive implications for supply within an economy because firms can afford to borrow more money. As the cost of borrowing has been lowered, firms can take out loans at low interest rates from lenders and invest in capital goods. This has long term benefits, as capital equipment constantly needs to be renewed.
It would seem that tackling unemployment is a higher priority for the government in this, the year of the US elections. Although Bush virtually has nothing more to lose as he is on the out, there might be Republican party pressure exerted on him to protect citizens jobs as they forward their new candidate, John McCain.
As to the question of rising unemployment and rising wages, it is clear that this is an example of stagflation. This economic phenomena was first seen in the 1970s when despite high unemployment, economies continued to suffer from high inflation. Just as in the 70's this phenomena has made a comeback, fuelled once again by supply shocks such as the high price of oil. As consumers have to pay higher prices, they demand higher wages. This inevitably raises costs for employers, and they begin to lay off workers, even though there is large competition for employment. The supply shock has implications for the natural rate of unemployment, since as costs to the consumer have been raised substantially, workers are not prepared to supply their labour below a certain wage level. Therefore a large pool of unemployment remains, coupled with rising inflation.
It is not likely that this situation will self correct, and therefore the government may consider the use of certain policies such as contractionary monetary policy. Increasing the interest rates would take money out of the system, so combating inflation. This could be combined with such supply side policies as decreasing the power of trade unions, allowing wages to be effectively lowered. Supply side policies were developed in the 70s to combat exactly this problem. They increase agregate supply, and so output, allowing firms to employ more workers. The only problem with these measures is that they are only effective in the long term, and so do not provide instant relief from economic trouble.
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So i had written this really long response and then it said that some quote was exceeded, so now to make it brief, i said that i disagree with using contractionary monetary policy because although it would decrease investment and consumption (by lowering consumer confidence), it would simply drive the country in further recession without resolving inflation or unemployment. Instead i think that the government should introduce supply side policies. Although these do usually work in the long run, if somehow the government manages to encourage the unemployed to seek and get jobs, this would increase consumer confidence and help unemployment. Also as there are more workers, production could increase, therefore there wouldnt be such a competition for prices and so the price levels would decrease, helping inflation. This is all theoretical however, because it depends on how well the government manages to encourage work and how many people will actually listen and try finding a job.
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1. Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
Although lower interest rates are clearly demand side policy, it also enables suppliers or producers to loan money at lower interest rate from the banks and invest in capital goods for new technology, new labor skills, etc. The loaned money can possibly expand the firm size and accept more workers, and consequently, relieving the unemployment rate.
2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
Increasing employment is a higher priority to policy-makers than bringing down the inflation rate because the solutions for unemployment are more visible in the short-run, in contrast to dropping inflation that would take quite a while to see the effects. The fact that it is an election year matter because popular vote would usually go to the party with the more impressive for social problems, hence, it is necessary for the incumbent party to shows its ability to solve problems. In addition, politicians are choosing unemployment over inflation because unemployment are problems that far more familiar to the voters and have direct connections with their lives.
3. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
The situation of US economy is a clear example of stagflation, a period of high inflation rates and high unemployment rate occurring simultaneously. It is unlikely that the US economy will ever 'self-correct" from in times of an economic slowdown because these problems would create a vicious cycle in which the situation would worsen. The anticipation for inflation trigger's people's expectations for higher wage, and these expectations become a self-fulfilling prophecy as the inflation rate keeps rising – there is no limit to the inflation unless people realize. The Phillip Curve best explains this situation. In the modern day economics, the Keynesian approach is more reasonable and practical especially in a situation like this. To combat this situation, there are several solutions that the government can do to reduce inflation and unemployment: reduce the power of trade unions who resist in reduction of real wage and impose minimum wage; issue combination of reduced benefit and lower tax to induce the unemployed to take lower paid job; increase geographical and occupational mobility through retraining; or establishing an effecient system of information flow for the unemployed.
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1. Lower interest rates encourage firms to take out loans because they pay lower returns on them. They can use these loans to purchase capital goods which can be used to increase their total output, this shifting the aggregate supply curve to the right.
2. Increasing the employment rate would probably be more important to policy makers, because the positive benefits of reducing unemployment are more visible and widely felt. This is especially important during election year; as politicians will be trying to gain support by promising policies that appeal to people. Thus, promising to reduce unemployment, or successfully doing so, is of an advantage to the current party in power because it wins them support and so they are more likely to do well in the recession. Lowering interest rates does not have such an immediate effect and is likely to take a longer time and making this an issue a priority is less likely to resonate with the public.
3. When interest rates and unemployment rates both rise, this is known as stagflation. I think that the U.S's ability to correct itself in times of a recession largely depends on how harmful it is and how widespread. In times of serious economic difficulty, like the 2007 financial crisis and the 1929 Wall Street Crash, however, I think that the US has very little chance of recovery, (or it would take a very long time), and some form of government intervention must be taken. Otherwise, things will head in a downward spiral; with the prices of goods and services rising but a fall in people's ability to consume them, and also people unreasonably expecting their wages to rise to match the rise in inflation, which causes them to increase further.
Under these circumstances, I think it is the responsibility of the government to a)keep a careful watch on the economy – not controlling it, just being aware of the situation and having plans that can be implemented to prevent a recession and b)In times of recession, for them to be proactive about introducing demand-side policies; reducing interest rates, job training schemes, subsidies for industries, increased unemployment benefits, reduction in the power of trade unions and imposition of minimum wages, and so on, so there is a support system for the economy and the people.
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Masaya,
I think that your points about requiring a lot of government intervention in order to end or reduce the harmful effects of a recession are very relevant in the US today, with all the damage being done by the financial crisis. The events leading up the financial crisis show that careful regulation/observation of the market is needed, even during boom times, because virtually all the economic problems in America today are the result of a small number of greedy individuals, in control of a disproportionate amount of money, who are given free reign.
Another thing is, I know a lot of Americans can be quite opposed to the idea of government intervention in the market. But I think that under current circumstances, the economy cannot do without stimulus supplied by the government, and that there are also many desperate people out there, made even more desperate by the financial crisis, who really need some kind of support network (minimum wages, etc), to balance out the rich-poor divide.
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1.Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
By decreasing the interest rate this will lead to an increase in loans as businesses will be able to take money out at much lower rates and therefore investing more money in capital goods in order to increase output and efficiency of the business. The consumers will also benefit form this as there payments will be decrease this means that they will have more disposable income which they can use to send and therefore putting more money into the economy. The move to decrease the interest rates would increase the AD demand in businesses and consumers alike.
2.Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
I think that there is an emphasis on unemployment for various reasons firstly because this is directly effecting the people and so policy makers are trying to appeal to the common people and this is more of an issue for them. Decreasing unemployment will als mean that the reward form this will be realised by the public more than other policies. The increase in employment will also mean that people have more money they are able to put back into the economy and so aiding the circular flow with more wages it means more money can be put back into the economy. The fact that it is an election is also key as politicians fight for every seat they can get and so they will try to please the common populous in America and un employment has greater effect on them than the inflation rate and so this has given unemployment a higher status.
3.“Workers’ wage gains – characterized as ‘modest’ – aren’t raising
inflation worries. Wary employers have cut jobs every month so far this
year and aren’t inclined to be overly generous in their compensation to
workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
I personally don't think that the American economy will ever self correct it self and if it did i think that the american economy would be shattered and they would no longer hold the power that they have no and so i feel that government intervention is necessary. The fact that the unemployment rate is increasing and inflation is increasing it will lead to a mis match and this will render the consumers unable to afford basics will dramatically affect living standards and will bring large social cost to America. This is why i firmly believe that it is of the government's role to aid and control the market of today because of its inability to self correct itself. I believe in times of recession that the government should implement both monetary and fiscal polices to stimulate the market it is also a role of the government to keep recession at bay during time of growth so it doesn't happen.
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Mei,
Great response to the passage and i am in agreement with your last question. I think that the government has a duty to the tax payers to stabilize the market and offer stimulus es in these times of need also i think its very true that the government need to be able to have plans ready to implement so they are able to prevent this from happening. Your answer to question one you state the effects this will have on the business i feel that this will also have a great effect on the consumers as there cost reduced meaning that they have more free cash available which means there will be more money put into the economy.
Dan
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1. Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
Lowering interest rates results in more loans, to both people and businesses. As businesses are better able to get money, they can invest more in capital. This leads to the long-term growth of firms.
2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
Generally, inflation is not generally acknowledged unless it is to the point where it has serious economic effects. Unemployment, however, is strongly prominent in peoples' lives. If a person doesn't have a job, then they are unlikely to be happy with their current situation. This makes them more likely to vote current politicians out of office.
3. “Workers’ wage gains – characterized as ‘modest’ – aren’t raising
inflation worries. Wary employers have cut jobs every month so far this
year and aren’t inclined to be overly generous in their compensation to
workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
If wages rise even as unemployment rises, the economy will likely never self-correct. Wages are the price of labor in the labor market. The higher the price of labor, the lower the quantity demanded. This means that firms will higher less workers, and unemployment will continue to rise. The economy will probably not self-correct.
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Daniel,
You mentioned that employment is more emphasized than inflation because when people earn more money, they will put their wages into the economy, and the economy will grow. Doesn't this contribute to inflation? When people have more money to spend, aggregate demand rises. This means that prices will rise, as a result of demand-pull inflation. Because of this, a reduction in unemployment can cause inflation.
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1. Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
Logically, if interest rates are lower, business can make a better profit out of loans; thus they have an incentive for more invesments, and indeed, start investing more. Hence, there are larger inputs being made to the economy, creating economic growth, resulting in positive effects.
2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
Yes, indeed, I think that the fact that it is an election year is a crucial factor when choosing to prioritize cutting down unemployment, since policy makers will be wanting to get the support of the people, and what better way of doing it than giving them jobs? In addition, unemployment also greatly affects the standards of living of people, and decreases the level of production of the country. So, even if it was not an election year, the government should take care of unemployment before inflation.
3. “Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
Well, eventually, it might, yes. Here's the thing: one would expect that, as wage rises, labor costs get greater, and thus businesses will lay off workers to reduce their costs, further increasing unemployment. However, as wages rise, those lucky ones have more money to spend and thus increase aggregate demand, making firms earn more, and eventually, be willing to produce more again, and hire back workers. Nevertheless, it is also possible that the wage rises do not affect aggregate demand, since they rise when others are deleted, after workers being laid off. So, I don't know. Depends on what happens after the first step, and whether the economy is able to pull itself back again after reaching its minimum level.
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Mattea, answering to your response to Daniel,
However, inflation is indeed a sign of economic growth, isn't it? As you said, aggregate demand increases… And aggregate demand increases because unemployment decreases, theoretically increasing production as well, let's say supply. Nevertheless, you are right, since, if demand grows faster than supply, due to consumer confidence and low interest rates, inflation will be leading to higher production costs, and thus unemployment in a further step, causing economic breakdown. But still, if supply is able to keep up with demand, due to technological advances which make production faster and a decreasing the need of workers, the economy will maintain its equilibrium. Or am I wrong?
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1. It’s very possible that lowering interest rates will lead to positive supply-side effects. Supply-side policies are ones that will fuel business growth and investment. With lower-interest rates, investors may find it easier to borrow money in order to invest in companies that would otherwise not be financially attractive.Also, this is easier for companies to acquire money with lower interest rates, allowing them to take bold new business ventures that will affect the supply side.
2. Elections are about people and what they think their elected officials are doing. If they lost their job because of a predictable and preventable routine of cyclical unemployment, some politicians may be losing their own jobs. Inflation is not something that really affects people as much as having a job does. That’s why this is the most important issue. Especially because of the fact that voters are going to the polls soon.
3. It’s certainly a valid economic question. But I think that unlike unemployment which can reach very low levels naturally, wages will not rise to an indefinite rate. There are certain restrictions on this that will prevent such a scenario. Wages will not rise indefinitely and are tempered by the fact that at some point businesses will want to start hiring more workers and expanding once again. It’s just part of cyclical unemployment.
Trevor Tezel
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Mattea,
I completely agree with you on your first point. On your second, I wonder whether or not the fact that prices are increasing with inflation, a very visible and important affect, that the public opinion toward the issue changes. It’s not as if this is just a concept which only politicians care about. Inflation affects all Americans. On the third point, I would argue that at some point there is a limited range on the amount of a wage increase that could be granted. But I see your point….
- Trevor Tezel
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1. Lowering interests would reduce interest, which would drive up investment. This would increase supply in the US as more investment leads to more production.
2. I do think that lowering unemployment is a higher priority to policy-makers than combatting inflation. The unemployed and those with unemployed friends and family members are a large voting force, which makes the fact that this was an election year important.
3. If wages and unemployment continue to rise at the same time, it is unlikely that the United States economy will ever be able to self-correct becuase firms will not be able to afford to hire new workers.
Chamonix
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Trevor,
I liked what you had to say about wages only rising to a certain rate. It is true, there is only so much that businesses can support. Of course, with low levels of employment production rates will fall, which will mean that firms will not make more profits than they might normally despite rising price. I think that in many cases employers will have to drop wages to hire new employees. This will have s detrimental effect on those already working, but I guess that it is worth it for the good of the whole economy.
Great Post!
Chamonix
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1. Lowering interest rates can result in positive effects for the economy because it will mean that firms can afford to take out loans and invest in capital goods. The loaned money can then buy new technology, new labour skills, and allows for more workers which can decrease the unemployment rate.
2. Increasing employment is of a higher priority to policy-makers than bringing down the inflation rate because solutions to increase employment are more visible and will happen a lot faster than dropping inflation, which would take a longer time. The fact that it is an election year matters because the candidates will find solutions that appeal more to the voters, and in this case, decreasing unemployment would be it. Unemployment is something that all voters would like to see solved and will vote for the candidate that puts more priority to this. Therefore, the government will be focused on this first and will deal with inflation later.
3. The simultaneous rise in interest rates and unemployment rates is known as stagflation. It is not very likely that the US economy will ever “self-correct” itself because with the rise in prices of goods and services comes people’s inability to consume them and expecting a rise in their wages to match the inflation rates, causing a vicious cycle. It would be very difficult for the economy to correct itself in this situation and some form of government intervention will probably be needed.
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Trevor,
I liked what you said about wages only rising to a certain point. I agree, firms can only increase their wages so much, and after a certain amount of time they will want to expand the company and will need to drop wages in order to hire more workers. If this happens with all, or most firms, the unemployment rate will slowly start to decrease and the economy can slowly start to mend itself.
Sara
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1. Lowering interest rates can result in positive supply-side effects for the economy because businesses will be encouraged invest, and some of their investments will go into capital goods, therefore shifting supply to the right.
2. Increasing employment is of a higher priority than bringing down inflation rate because policies to increase employment will be directly felt by the public and will therefore be favored in an election year. Politicians try to win the public over with policies that they will actually care about in the short run, thus increasing employment is the clear winner. The public sees the effects of inflation lowering policies much later, therefore politicians cannot really use it to their advantage.
3. If wages continue to rise along with unemployment and there is absolutely no government intervention, I believe the economy will not simply "self-correct," however, the government always finds a way to intervene and regardless of what policy they decide to go with, it will eventually continue the cyclical movement and bring the economy back to normal. The cyclical behavior of the economy will not just stop because wages and unemployment are simultaneously rising, there will simply have to be a new solution, but it can be fixed.
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Sara,
You and I answered pretty much exactly the same for every question. I'm just wondering, for number two, what exactly would be an appropriate government intervention to fix the stagflation? I'm not sure, but I am pretty sure that regardless of the situation, the economy will always pull back because of its cyclical nature.
-Dennis-
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1.Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy? Lower interest rates support firms to take out loans because they pay lower returns on them. They can use these loans to obtain capital goods which can be used to increase their total output.
2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter? Increasing the employment rate would probably be more important to policy makers, because the positive benefits of reducing unemployment are more visible and widely felt. This is especially important during years of election; as politicians will be trying to gain support by promising policies that appeal to people. Thus, promising to reduce unemployment, or successfully doing so, is of an advantage to the current party in power because it wins them support and so they are more likely to do well in the recession. Lowering interest rates does not have such an immediate effect and is likely to take a longer time and making this an issue a priority is less likely to resonate with the public.
3. “Workers’ wage gains – characterized as ‘modest’ – aren’t raising
Inflation worries. Wary employers have cut jobs every month so far this
Year and aren’t inclined to be overly generous in their compensation to
Workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown? The U.S’s capacity to correct itself in times of a recession largely depends on how harmful it is and how widespread. In times of serious economic difficulty, like the 2007 financial crisis and the 1929 Wall Street Crash, however, I think that the US has very little chance of recovery, (or it would take a very long time), and some form of government intervention must be taken. Otherwise, things will head in a downward spiral; with the prices of goods and services rising but a fall in people’s ability to consume them, and also people unreasonably expecting their wages to rise to match the rise in inflation, which causes them to increase further.
Under these circumstances, I think it is the responsibility of the government to a)keep a careful watch on the economy – not controlling it, just being aware of the situation and having plans that can be implemented to prevent a recession and b)In times of recession, for them to be proactive about introducing demand-side policies; reducing interest rates, job training schemes, subsidies for industries, increased unemployment benefits, reduction in the power of trade unions and imposition of minimum wages, and so on, so there is a support system for the economy and the people.
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1.Governments can use exchange rates to affect economic performance. A rising exchange rate, which is often linked to an increase in base interest rates, leads to exports becoming more expensive but imports falling in price. This would reduce part of the inflationary pressure within an economy. A fall in the exchange rate would lead to the reverse and might help domestic businesses export more.
2.Increasing employment is of a higher priority than bringing down inflation rate because deflation may cause people to postpone their spending in the expectation of even lower prices in the future. When this happens, aggregate demand falls, businesses are unable to sell their goods, make profits or meet their debt repayment obligations, and they may be forced to cut output and employment of workers. A downward spiral becomes established in which aggregate demand falls even further which leads to even lower price
3.If wages continue to rise along with unemployment plus no government intervention; the US economy is very likely not “self-correct” itself because the increase in prices of services and goods will make them expect of increase in their wages to relate the inflation rates which will cause a malicious problem.
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Marcelo,
Marcelo, you have written your answer very long which showed many details of facts I could learn of inflation, deflation relating to the employment and unemployment. Of course, I noticed the questions we have had to do were very interesting and much better for me to learn and so, even through your answer, more than what I knew, I could learn more and in more detail. Thank you!
Armando.
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@Armando
I think you got it the wrong for question one.
Let’s say that you own a export company in Japan and your trade partner is in US. When Japanese yen is stronger than US dollar (for example 90yen = 1 dollar), it is disadvantageous for your company because for every dollar you sell in US, you only get 90yen. On the other hand, when Japanese yen is weaker than US dollar (for example 110yen = 1 dollar), you earn more profit because for every dollar you sell in US, you get 110yen. You see.
It gets confusing because we tend to think in consumer perspective. Obviously, it is advantageous for me when Japanese yen is stronger because I can get US products cheaper than market price due to exchange rate. But it is disadvantageous for firms who sell oversea.
Did I make this clear, or made it more confusing?
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1.) With lower interest rates, firms can be expected to take out more loans, purchase more goods, and potentially expand their business. The investments that lower interest rates encourage can lead to expansions in manpower (new jobs) or technology – which would increase supply. Consumers would also be encouraged to purchase more, and invest more money in the economy.
2.) In an election year, people are more likely to vote for the party that implements significant change. This change has to be something positive that the voters can feel the affect of, which therefore makes the voters automatically more receptive to social change. By decreasing unemployment, the government can help the people who are suffering most – those without jobs. While decreasing the inflation rate is an important issue to address as well, increasing employment is a higher priority in the short run, especially in an election year.
3. If wages continue to rise even as unemployment rises, the U.S. economy will not self-correct from times of an economic slowdown. This type of division would greatly separate the American public. There would be those with jobs and increasing wages, and those without any income (people who would make up a growing percentage of the population). This scenario would greatly affect the consumer’s ability to purchase goods available in the market, a negative in all aspects. Here, Keynesian economics would work better, I think. Keynesian economics promote government help in times of hardship. When more and more people are unemployed, the government should intervene to correct the economy, especially seeing as, in this situation, the economy probably would not correct itself.
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Hi Mei,
I liked your response to the third question, and your comparison of the relationship between a government and its people to a support system. I think there is a delicate balance between a government being too involved and it being not involved enough. Definitely, in a situation like this, the government should be involved in the problem and help fix it. You also give great examples of what the government can do to help the problem, like subsidies for industries and increased benefits for the unemployed. Great post!
- Catherine
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1. Lowering interest rates has positive implications for supply within an economy because firms can afford to borrow more money. As the cost of borrowing has been lowered, firms can take out loans at low interest rates from lenders and invest in capital goods. This has long term benefits, as capital equipment constantly needs to be renewed.
2. In an election year, people are more likely to vote for the party that implements significant change. This change has to be something positive that the voters can feel the affect of, which therefore makes the voters automatically more receptive to social change. By decreasing unemployment, the government can help the people who are suffering most – those without jobs. While decreasing the inflation rate is an important issue to address as well, increasing employment is a higher priority in the short run, especially in an election year.
3. If wages continue to rise along with unemployment and there is absolutely no government intervention, I believe the economy will not simply “self-correct,” however, the government always finds a way to intervene and regardless of what policy they decide to go with, it will eventually continue the cyclical movement and bring the economy back to normal. The cyclical behavior of the economy will not just stop because wages and unemployment are simultaneously rising, there will simply have to be a new solution, but it can be fixed.
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catherine,
i just loved when you said: "the economy probably would not correct itself." that is not even a probably sentence; economy is NEVER going to correct it self.
Laura
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# Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
Supply side policies encourage business growth and investment. With lower interested rates, investors are able to borrow money to invest into companies or companies can take out loans to invest into capital goods or more employment. Over long term this will help supply.
# Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
Increasing employment will increase aggregate demand, as consumers have more money to spend. As lowering inflation rate is long term, this cannot be achieved quickly. Therefor this being an election year does make a very big difference.
# “Workers’ wage gains – characterized as ‘modest’ – aren’t raising
inflation worries. Wary employers have cut jobs every month so far this
year and aren’t inclined to be overly generous in their compensation to
workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
History has shown that without government intervention, you can simply not get out of this type of spiral. It depends on the severeness of the downfall but the recession of 1929 and the in the fragile economic climate we are still in today. I reckon the US economy wouldn't "self correct" as history has proved it and its unrealistic looking at the situation.
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1)Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
By lowering interest rates the government is not only giving consumers confidence but also firms as they will take on loans, since they have to pay lower returns on them, and with those loans can invest in more capital goods and increase the productivity of the firm, thus creating a higher aggregate supply.
2)Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
In elections politicians will strive to gain the most voters by promising the policies the majority of the people want. Unemployment is a more popular issue than inflation to most people, as it is more felt by the population while inflation is more a long run phenomenon that is hardly perceptible and not many people are fully aware of the consequences inflation has in the long run. Thus policy-makers will tend to prioritize unemployment as it is more popular with the general public.
3)“Workers’ wage gains – characterized as ‘modest’ – aren’t raising
inflation worries. Wary employers have cut jobs every month so far this
year and aren’t inclined to be overly generous in their compensation to
workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
With wages rising companies will lay off workers to decrease their costs. In doing so unemployment rises and people will find it harder to get by, especially considering the rising inflation. Because of this aggregate demand will go down, and with it aggregate supply as factories now have less workers. The economy would not self-correct and would need government intervention, through expansionary and contractionary fiscal policy.
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Karen,
I really liked your post. I agree with your ideas on the responsibility of the government in an economy – complete government control of an economy is usually detrimental and through demand-side policies the government could boost aggregate demand and thus also the economy. I do have a question though, wouldn't increased unemployment benefits encourage the unemployed to stay at home longer? And thus make it harder for an unemployed worker to find another job?
-Eline
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1. By lowering interest rates, consumers gain more confidence in investment. Because of increased confidence, more people will take out loans with corporations, which will allow the corporations to then use that money to buy more labor, land, and capital, thus increasing supply.
2. The honest answer is votes. Policy-makers care about nothing more than to stay in office, and do so by playing to what the voters want. Voters want jobs. Sure prices go up, but that is something that just happens, it is not the policy-makers fault…at least that is their view. But if they don’t have a job, it’s because the policy-maker is not doing his job. So the policy-maker gives the people what they want, they tackle unemployment. FDR did it in his administration, and even though it nearly drove our country further into the ground, the voters were happy because they had what they wanted.
3. It is possible that it will not self-correct at the current time because prices are going up and less and less people can afford simple products as it is, and then they lose their job making it worse. Since money is based purely on faith, all will be lost and the economy will die. Government intervention would then be needed, to increase faith and confidence. Lowering wages while fighting inflation would be a good turn around to balance out the economy.
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Ralph,
I agree with what you said about how government intervention is needed. It was supposedly Hoover's laissez-faire policies that caused the Depression. However, the government has to be careful with what they do. FDR, in my opinion, did not do much to help the economy, so his intervention was ineffective. The war got us out then, but it is certainly not helping now. This is mostly because defense spending was still high since the Cold War and we did not have to create thousands of jobs to help the effort like we did in 1939. But if the government is smart about their policies, they can speed the recovery, if not they will only lengthen the downturn.
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I believe that the government tends to focus on unemployment more than inflation because unemployment is a shift that can be easily seen in the economy by the population. Also, because job security is relatively important to the population I believe it is the governments concern that the population will become restless because of a lack of employment. I also beleive that most americans dont truelly understand what inflation is and how it can also be extremely damaging to the economy. I think that in the eyes of most Americans, as long as the value of their dollar doesn't change, even if prices are rising, that their fine with current us inflation.
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I have to agree with Congress with their decision to fight unemployment rather than inflation. The Fed needs to lower the unemployment rate even if its just for a short period of time until it returns back to the natural rate of unemployment. If the Fed increases the money supply, they can lower interest rates, thus causing investment and spending to increase. Due to the increase in both investment and spending, real output and prices rise causing the unemployment rate to fall. The Philips Curve helps show the negative relationship between inflation and unemployment, and how in increase in output causes an upward movement along the short-run Philips Curve. Even though lowering the unemployment rate causes inflation to rise, I still believe it is necessary for the Fed to try to lower the unemployment rate especially during these economic times.
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1. Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
Maybe the fact that lowering interest rates result in positive supply-side effects for the economy is due to the fact that the people would be encouraged to invest and consume because of the low levels of interest that may be present in the economy.
2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
Unemployment and inflation are strictly correlated, thus changing one will result in the change of the other. It is easier and more urgent for an economy to tackle unemployment rather than inflation, also because with an decrease of unemployment there will also be a decrease in the rate of inflation. I say it would be easier to change unemployment rather than the rate of inflation because in order to change inflation, the government would have to go through monetary contraction, reducing the amount of money in the economy or a fiscal expansion, diminishing the interest rate, and subsequently the inflation; and both these procedures are much longer that changing the level of unemployment. The fact that it is an election year also matters, as whoever wants to be elected wants to have the vote of whoever is jobless, thus states that the problem of unemployment will be tackled in his economic campaign.
3. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
If wages continue to rise as unemployment rises, the economy will find itself in a position in which self-correction will become pretty difficult, and it would be possible only in a long run where an equilibrium will be found and both wage level and unemployment will go back down. But to avoid this time taking procedure, it would be easier for the government to enact some policy in order to resolve this continuing cycle.
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1. Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
The definition of a supply-side policy is a policy that aims to increase the capacity of the economy to produce. By lowering interest rates, not only are you increasing demand, but you are also increasing the ability of the people to produce more. Entrepreneur A was only able to produce X amount of goods from loans until the interest rates dropped and he could borrow more, expand his factory, and produce an increase Y amount of goods.
2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
I believe that there are political factors involved in their preference. The first goal of the politician is to be reelected, as the primary objective of the entrepreneur is to make profits. The basis of a person’s vote depends on the person’s level of dissatisfaction with the status quo. Thus, naturally, the questions at stake for the politician are which one makes people suffer more? and which one will there be conspicuous recover in the short run? Although a high rate of inflation will have a substantial impact in the people’s purchasing power and consumer well being, unemployment devastates a household – the ramifications are simply incomparable. The price of goods may rise to a degree, and people could become discontent with the state of the economy. However, when people are void of occupation and thus income, they turn desperate, and seek for a change. As for the second question, the impacts of anti-unemployment policies are more visible in the short run than those of anti-inflationary policies. Decreasing inflation rates takes a while to come to effect and cannot play a role in the upcoming elections. Therefore, the politicians would choose to tackle the former.
3. “Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
The case of the United States is a clear example of stagflation, a situation in which the unemployment and inflation rates are rising simultaneously. It is highly unlikely that the US economy will ever “self-correct” itself in times of an economic slowdown because it’s locked into a vicious cycle of self-fulfilling prophecy. The people’s expectations of inflation leads to expectations in wage claims, and in many cases, a wage rise takes place. This, however, will worsen the cost-push inflation, which will further contribute to raising the people’s expectations. The government can take several measures to break free from this cycle of doom by reducing the power of trade unions, issue a combination of reduced benefit and lower tax to induce the unemployed to take lower paid jobs, increase geographical and occupational mobility through retraining, establish an efficient system of information flow for the unemployed – all of the aforementioned policies will help fight the unemployment level and cut the vicious cycle of self-fulfilling prophesy.
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@Deniz
3. Are you sure that 'in the long run' the economy will self correct itself without government intervention? Also, what types of policies would you recommend to tackle this issue?
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1) Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
Lower interest rates, as mentioned, increase business investment and consumer expenditure or consumption since it’s now cheaper to borrow money from the bank. Increased levels of investment in the factors of production (labour, capital, raw materials, and even enterprise) contribute to an increase in productivity and thus an increase in overall output, meaning that the aggregate supply curve of an economy shifts to the right. This is certainly regarded as a positive supply-side effect. Given that lower interest rates also increase consumer expenditure, producers will be more inclined to produce more (further increase their output/supply) in response to an increase in demand in order to maximize their profits and utility. This is another positive supply-side effect triggered by lower interest rates, a demand-side policy.
2) Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
Policy makers should be more concerned about reducing inflation, rather than unemployment for several reasons.
First of all, inflation affects the ensemble of the economy, and therefore has more significant impacts on a nation’s economy.
During inflation, especially for individuals in a society whose wages or savings are fixed and not adjusted to inflation, purchasing power will decrease since real wages are reduced. The value of savings is also reduced. The overall loss of purchasing power reduces living standards, and generally creates unrest amongst the labour force who will opt to receive wages and salaries adapted to inflation. This will increase the costs of production, shifting the aggregate supply curve to the left, thus increasing prices, and causing further inflation and unemployment. The depreciated value of savings will discourage investment, and lower purchasing power will also do the same. Increased interest rates in attempts to reduce inflation and in order for banks to maintain their profits in real rates further decreases investment, and thus shifts the aggregate supply curve to the left, raising average price levels further. An inflationary spiral occurs. Unless inflation is reduced, the economy in question would only experience progressively slower growth.
National exports will become less competitive internationally at higher prices, and demand for imports, cheaper (from countries with lower inflation rates) will increase, therefore increasing the leakages in the circular flow of income in the economy, and decreasing national output/income. This may lead to unemployment, not only in export industries as is China’s case, but in other industries as well. By establishing policies which fight inflation, economic policy makers are also likely to indirectly reduce unemployment.
Unemployment comparatively does not trigger costs which are as devastating economically as does inflation. The costs of unemployment for example are lower living standards of the unemployed, higher crime rates, loss of tax revenue for the government, and increased government spending in the form of unemployment benefits. Note that all of this deals only with a minority of the population in an economy.
In conclusion, the greater costs of inflation suggest that it should be of greater concern to economic policy makers than unemployment, although a balance between both is amongst the desired macroeconomic objectives.
Moreover, I do not believe that this prioritization should change during an election year bearing in mind that it’s in the candidate’s greatest interest to opt for more stable rates of inflation in their economies in order to gain more political support.
3) If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
Unemployment and inflation, the two evils of any economy, when occur simultaneously along with a lack of growth in consumer demand and business activity, are described as stagflation. This is certainly an unpleasant state for any economy to be in since policy-makers are faced by the trade-off between unemployment and inflation. Aggravating the confusion in this decision is the fact that it’s very difficult to determine which type of inflation and/or unemployment is in question, thus making the choice of policies to implement tricky. Is it possible for an economy to self-correct from this situation? Following the neo-classical LRAS approach, self correction is possible in the long run as the economy will always return to the full employment level of output. However this only happens in the long run, a situation which only comes to be after much suffering from both inflation and unemployment. Moreover the time lag after which this full employment state is achieved varies with the rates of inflation and unemployment.
Following the Keynesian model, government intervention would certainly be necessary in order to limit the consequences of both inflation and unemployment on the economy and society in question to the minimum, and also to reduce their duration. This can be done through the administration of both demand and supply side policies. For example, the government may run a budget deficit to increase its spending in efforts to reduce unemployment, also done through the implementation of supply-side policies aiming to increase a nation’s potential level of output. Interest rates may be raised (a monetary demand-side policy) which is the best way to counter inflation. A certain rate of inflation may also be set as a goal by the central bank in order to ensure price stability.
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Comment to mei.echl.f09:
I agree with you on the account that increasing employment is a crucial aspect to be considered so as to maintain a healthy economy, but do you not think that reducing inflation should take priority over reducing unemployment since this does not necessarily affect all members of a society as directly and as harshly as inflation does? Moreover a decrease in unemployment may not necessarily reduce inflation, but with an increase in AD, it may trigger demand push inflation. On the other hand, if the inflation rate is stabilized, employment will also rise since producers can now invest in more factors of production (labour) at the given prices…
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Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
“Workers’ wage gains – characterized as ‘modest’ – aren’t raising
inflation worries. Wary employers have cut jobs every month so far this
year and aren’t inclined to be overly generous in their compensation to
workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
Lower interest rates are implemented with the motive to increase aggregate demand through a rise in consumer spending, fall in saving and rise in investment. This could function as a supply side policy given that investment is a build up in the stock of capital, and more capital may lead to higher production (this is effectively an increase in the quantity of the factors of production available). Furthermore, an increase in consumer spending may lead to an increase in profits for firms, generating more funds available for expansion and further investment. firms may increase their stock of labour to facilitate this rising demand and thus expand production to fulfill rising consumer wants. Thus in the long term lower interest rates may lead to increased supply.
Unemployment has more immediate negative effects on the economy and is more noticeable. Unemployment also has significant side effects that can result in a vicious cycle (lower incomes due to unemployment, less aggregate demand in the economy, less spending, firms' profits squeezed, more unemployment). This multiplier effect enhances the negative effects of unemployment on the economy. The unemployment rate is also a figure that more people are familiar with; inflation index numbers tend to be a barometer for economists. The average citizen is more familiar with working and could probably sympathize with the unemployed; therefore, a high unemployment rate places a demand on the government to relieve its citizen's worries immediately (especially if the year is one of political elections where the citizen's vote is imperative)
Rising wages during times of rising unemployment results in fewer people earning a proportion of income. This income can be used to increase aggregate demand in an economy which can facilitate a rise in production as firms expand to accommodate the rising demand. thus the higher wages can 'self-correct' an economy in recession if the wages manifest into increased consumer spending. Nevertheless, this is a long shot given the high number of unemployed who would also need to begin work if the economy is to recover. Thus government intervention would be necessary to alleviate the situation in the economy.
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Response to Eline.
Eline, you mentioned that an increase in unemployment would have limiting impacts on the level of aggregate supply in an economy. This would further reduce the ability of the economy to self-correct. In my response I had only considered the demand-based aspect of the problem, however supply would also need to increase in order to improve the conditions – rising supply leads to higher output and a larger proportion of consumers' wants and needs can be satisfied, an attribute of a strong economy.
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1. Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
With low interest rate being a demand side policy, it gives producers ad loaners an opportunity to loan money at a lower interest rate from loaners to investors. The money that is loaned helps a firm renew their work force, materials, equipment. etc.
2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
Increasing employment is of a higher priority to policy makers than bringing down the inflation rate as it is an easier method to follow and it can be achieved in the short run, whereas inflation can be done during long run. Yes, the fact that it’s an election year does matter because it helps contenders to make a difference and obtain more votes. If the contenders prove that they are capable of reducing problems in a country they will be elected (in this employment and unemployment rates). This allows the government to focus on employment rather an inflation which is a long due process.
3. “Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this
year and aren’t inclined to be overly generous in their compensation to
workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
In my opinion we can leave the US economy to “self correct” in times of economic slowdown but supervision will be needed and that is where the government intervenes. At some point firms will want to rehire/ hire new workers and if the economy still continues to be in an economic slowdown it is a loss for the company.
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@Abhinav
I agree with you…Good Answers!
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1. Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
This also increases employment, which means that companies become more efficient or at least their output increases. That is, in other words, a shift to the right in the supply curve. Low interest rates cause this because they encourage people to find jobs.
2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
Because employment is more of a priority to them than inflation rates are. If people lack jobs, they are unhappy and on a macroeconomic level, the GDP decreases. Also, since it is election year, the lower unemployment percentage makes the politicians look better and more proficient. That could play a part in their priorities.
3. “Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
Neo-classicists say that it will reach a point when the wages get so high that people agree to find jobs, and unemployment goes back to equilibrium. The economy will self-correct, it is just a matter of time. That is not to say that the government should not help out with monetary policies and such.
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@Deepa John:
You did a much better job articulating why interest rates would lead to an increase in employment, and you're right, the equipment would be improved as well, and therefore the efficiency. Good answers, I am glad I read through them!
-Michael
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-Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
Lower interest rates will result in more consumer expenditure but also increase firms’ investment. If firms have to pay less interest they will buy more factors of production and can thus increase aggregate supply.
-Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
Policy-makers would rather bring the level of employment up, especially in an election year, because people think more about the fact that they have a job or not than the fact that they are paying a little more for products. If people have a job they will be happier and complain less about the economy but if people don’t have a job, whether inflation is high or not, they will be more unsatisfied with the economy’s status.
-“Workers’ wage gains – characterized as ‘modest’ – aren’t raising
inflation worries. Wary employers have cut jobs every month so far this
year and aren’t inclined to be overly generous in their compensation to
workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
I think that the US economy will self-correct at some point. It might take a bit of time but at some point firms will have to rehire in order to produce more. Workers’ wages will stop increasing by as much so that firms can start hiring more people.
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@Deepa John
I might be misunderstanding your answer to question three but it seems that you are contradicting yourself. If the economy is going to self correct, this would mean that there is no government intervention. Just wondering.
Noah
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1. Low interest rates will result in higher investment and more consumption, therefore, the demand of goods and services will increase. Firms and companies will hire more workers to satisfy the increasing demand and workers will be encouraged and motivated to work more since they know that interest rate is low. Therefore, the economy will use its resources to its full potential since use of the factors of production will be maximized. There will consequently be an increase in production that will lead to a raise in the supply that could eventually make prices go down and it can be a further increase in demand and investment.
2. Increasing employment is a higher priority to policy makers than bringing down the inflation rate because by maximizing the labor force, the production of goods and services will increase and the economy in general will grow. Moreover, by raising the supply of goods, then the prices will consequently fall, resulting therefore in also eliminating the initial state of inflation. Another reason for which employment is a priority is that the government will have to care less on helping services and therefore could invest more money in further education, research or new technologies that could eventually help work and resulting in even more production.
3. If wages continue to rise even as unemployment rises, then US economy will surely correct in the long run. Now, if we look from a classical point of view, we see that the economy will self correct without any government intervention, whereas from the Keyrsian perspective the economy will never self-correct without any government intervention.
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Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
-Low interest rates will increase the investments made by firms. This increases their production potential, and therefore there supply. Also consumers will by more inclined to spend money, increasing demand, which will force companies to hire more workers increasing the supply.
Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
-It is very difficult for people to live if they do not have a job. Increasing employment would ensure that more people have jobs, making it easier to live through these difficult times. Inflation does similar damage to living standards; however, it is spread out through the entire population of the country since everybody has to pay the increased prices. Therefore the country is focussing more on making sure everybody suffers a bit as opposed to a group of people barely surviving. I do not believe that the fact that it's an election year is impacting the government's decision to do this. This seems like the right idea no matter the time.
“Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
Under the Neo-classical theory the economy would self-correct. In my opinion, the economy would follow this theory in this case. When a firm lowers its wages, some people will be upset and quit, but others will realize that they still would not be able to find a superior job. With unemployment still rising, these unemployed people will be happy to take the job at a lower wage, and employers will be able to higher more people as well. As long as unemployment is at this high a level, wages will remain slightly flexible.
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@Eleonora
I really like your explanation in question 2. You do a great job of explaining how increasing employment will indirectly reduce inflation. I also like your point about how the government will have more money to spend on education and other things that will improve growth and development due to less money being spent on unemployment benefits.
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• Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
If the interest rates are low, then the demand for materials that affect supply will rise, as it is cheaper to invest in them, this increased productivity results in more supply.
• Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
I would say that un-employment drags more money from the government than fighting inflation, as inflation doe not involve so much money as paying unemployed people a benefit for their food and health. If unemployment is fought off then the government can focus on inflation with greater strength as it has more money to invest. It is fortunate that it is election year, because more people understand unemployment than the concept of inflation, thus it is easier to get the message of a success accomplished via unemployment across than via inflation; sadly it is most likely true that the election year also has an effect on the policy making, but fortunately the right decision was made.
• “Workers’ wage gains – characterized as ‘modest’ – aren’t raising
inflation worries. Wary employers have cut jobs every month so far this
year and aren’t inclined to be overly generous in their compensation to
workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
I believe that it is unlikely, as this double rise makes it evermore impossible to get jobs, and increasingly difficult for unemployed families to purchase any type of good. A breach between the rich and poor is being opened, and if it is left unattended then most likely there will be no correction, as the economy is going two negative ways at once.
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RE: Eleonora
1. I know what you mean, and that is what I said, but I dont think that the example you used is entirely correct, because you cannot really ask for a loan of employees, perhaps other factors of production will be looked at such as machinery, and also I dont think the average employee would be thinking about interest rates unless they need a loan.
2. Agreed upon
3.If wages increase this will cause inflation, at the same time as unemployment, how do you expect the economy to self correct!?
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1.Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
Even though lower interest rates are demand side policy, it also lets suppliers to loan money at lower interest rate from the banks and invest in capital goods such as new technology and new labour skills. Companies will have more money, so they can use the loans to purchase capital goods which will increase total output shifting aggregate supply curve to right. Companies will have more money to spend money on production due to low interest rate.
2.Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
Increasing employment is a higher priority to policy-makers than bringing down the inflation rate because in long run low unemployment rate will get rid of inflation. An election year matters a lot because people will vote for policies that sound good and sweet which is less unemployment.
3. “Workers’ wage gains – characterized as ‘modest’ – aren’t raising
inflation worries. Wary employers have cut jobs every month so far this
year and aren’t inclined to be overly generous in their compensation to
workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
It is pretty obvious that this situation is a stagflation which means a period of high inflation rates and high unemployment rate occurring simultaneously. If I were the head of America, I wouldn’t do self correction which I think American government will do too.
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@deepa
i think u mistated your thought in 3. If government decided to do self correct then there is no intervention
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1. Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
Lower interest rates could help promote investment and money borrowing. Investment in technology or new labor skills could help firms become more efficient. By doing so, firms could either produce at lower costs or experience economies of scale and expand production. If this were to happen, aggregate supply could be increased.
2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
Increasing employment rate seems to be of higher priority to policy makers, because maintaining people employed helps keep the economy producing. Perhaps if employment levels are increased, eventually aggregate supply could also increase. An increase in aggregate supply would help lower price and control inflation. The effect of unemployment policies is manifested in the short run, while inflation rate policies take longer to take effect. Because the effect is seen faster, policy makers are more prone to focus on policies which will yield a more immediate effect and satisfy a concerned public. Yes, the fact that it is an election year definitely matters because candidates will want to focus more on unemployment because it is a greater concern than inflation to many. Therefore, candidates will focus on policies which will tackle what appears to be the most concerning problem so that they will gain the public’s support.
3. “Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
It is very unlikely that the US economy will self-correct when both inflation and unemployment are growing at the same time because prices are only growing higher while more and more consumers’ disposable income diminishes. This means that aggregate demand will only drop lower and lower as there is no force to stir up consumer demand. An economy in such a situation needs government or bank intervention to inject money into the economy or make some changes that will either help lower inflation or increase the employment rate.
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@Mitchell_Broughton
Although I agree with
you that it is always a good idea to focus on diminishing the amount of people without a job, I think that maybe you are forgetting how important public image is to political candidates. If it were not an election year, policy makers might focus a little more on inflation policies because they are not so worried about producing immediate effects. However, because it is an election year, the focus is on making changes that will prove that they are working by producing fairly fast results, such as increasing employment.
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Lower interest rates could help promote investment and money borrowing. Investment in technology or new labor skills could help firms become more efficient. By doing so, firms could either produce at lower costs or experience economies of scale and expand production. If this were to happen, aggregate supply could be increased.
Increasing employment rate seems to be of higher priority to policy makers, because maintaining people employed helps keep the economy producing. Perhaps if employment levels are increased, eventually aggregate supply could also increase. An increase in aggregate supply would help lower price and control inflation. The effect of unemployment policies is manifested in the short run, while inflation rate policies take longer to take effect.
It is very unlikely that the US economy will self-correct when both inflation and unemployment are growing at the same time because prices are only growing higher while more and more consumers’ disposable income diminishes.
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@ Nicole Sonderegger Norris
completely agree with you and the fact that since its election year then, the candidate will only focus on the short term in order to produce fast positive resultas and this way earn more public support.
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“Workers’ wage gains – characterized as ‘modest’ – aren’t raising
inflation worries. Wary employers have cut jobs every month so far this
year and aren’t inclined to be overly generous in their compensation to
workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
1. Low interest rates encourage the consumption and the investment. The firms and the consumers become willing to borrow money and spend. The firms can invest in technology or capital to increase their output. Besides, the increase in consumption may be an incentive for the firms to increase their production.
2. It is important to get the economy to full employment to increase the production. Inflation can be solved easier than unemployment, as well. Interest rates can reduce the inflation rate easily. However, reducing unemployment takes more time and harder to do. Politicians also think that unemployment is a more obvious problem than inflation in the society. So, decreasing unemployment rate would be more beneficial in the elections.
3. It is so unlikely that the economy will self-correct. Inflation and unemployment are high at the same time. Aggregate demand is low and the government should increase the economic activity by increasing the aggregate demand.
3.
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@Nicole_Sonderegger_Norris
I agree that the government or the banks should inject money into the economy to reduce unemployment. People's disposable incomes are low and that leads to low consumption. The government should intervene to increase the consumption.
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1. Lowering interest rates might result in positive supply-side effects for the economy since doing so could support the stimulation of borrowing money as well as investment. Efficiency is something that comes after investing in new things such as technology (new machines, new ways of producing supply), thus making the firms to be able to experience economies of scale. With new technology firms are able to produce more with less, meaning that they don’t need so many working people so they gain more profits by firing these people and using the new technology.
2. I think that increasing employment is of a higher priority to policy-makers than bringing down the inflation rate because the more people are employed, the more can a firm be able to produce (if it is the case of no useful or new technology). The higher employment of people is a supply side policy, meaning that it positively affects the supply of the market. Inflation is therefore controlled and prices are kept low or reasonable. Also, unemployment takes less time than inflation to occur, so that is why policy-makers focus on problems that are more closely seen. The fact that it is an election year does matter because unemployment is a greater problem that people face daily every year. Inflation, on the other hand, is something that is seen every other year, sometimes it is low and sometimes it is high, but it affects everyone in general, not only some specific people. The parties that are running for the government will therefore win more votes from the people if they focus more on the unemployment problem rather than on inflation.
3. It is not likely that the US economy will self-correct in times of an economic slowdown when they are having trouble with both unemployment and inflation. While the disposable income of the consumers decreases, prices increase, thus making the aggregate demand to decrease, too. For the US economy to solve such a problem, government intervention is needed, or bank intervention, too. The bank would help with the money in the economy and by decreasing the unemployment rate, and the government would help by trying to change the inflation by lowering it.
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@Nicole_Sonderegger_Norris
I completely agree with all your answers. I like how you explained that the effect of unemployment policies is manifested in the short run, while inflation rate policies take longer to take effect, therefore policy-makers focus more on the unemployment problem than on inflation.
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1.Lower interest rates can increase investment and money borrowing. Invest in technology, labor skills can be advantages for the firm. Leading to lower cost later on and shifting aggregate supply to the right.
2. I think increasing employment rate is better off to be a higher priority because in order for the country to keep their productivity high, employees should be employed. This will cause a higher aggregate supply and this can lower down inflation since price will be lower.
3.The economy will likely never self-correct because this will affect the market. When the cost for labor is high, the quantity supplied will decrease as well as the quantity demanded. This will make the firm has to hire lesser employees and unemployment will rise. economy will probably never self-correct.
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# Nicole_Sonderegger_Norris
nice explanation and answer
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Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
Lowering interest rates would result in positive supply-side effects for the economy because producers would be more productive and effective which would lower the cost of the overall production within the economy.
Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
Increasing employment is a higher priority because the more people that are working, the higher the general economy. Also, since it is an election year, government officials realize that reducing unemployment makes the population happier and more likely to vote for them. Essentially, they are putting themselves over the general welfare of the economy. It is selfish.
“Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
The US economy will not self-correct. The economy will continue to attempt to overcorrect itself which will only lead to worse and worse economic conditions.
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@MichaelMayer
Won't the government just continually attempt to correct itself which will only lead to worse and worse results?
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1. Lowering interest rates will help increase the aggregate supply as the demand for products will increase. As there are more opportunities for loans and mortgages, people can spend more and thus the consumption will increase. Because the consumption increases, the demand will increase and hence the aggregate supply has to adjust in the long run by shifting rightwards. Additionally, there are more private investment opportunities that will increase the technology output of the aggregate supply.
2. Increasing the employment is a higher priority because then the people would have money to buy the goods from the market. On the other hand, if the inflation is lowered, people will still have no money to purchase so there is no positive effect on the long run of the economy. It does matter that it is an election year because this action will please the people and earn more votes.
3. The economy will not self-correct. It will try but it will fail. This actions will cause an increase in separation between the rich and the poor. A higher percentage of people will be poorer and a more exclusive circle will be established for the rich. This will then cause an inefficient distribution of wealth. This in turn, will cause an economic slowdown.
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@ Jackson Mote
I do agree with most of your points. However, I do think you could explain more about the self-correction of the economy instead of the economic slowdown.
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1. Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
Lowering interest rates would make it cheaper for businesses to borrow money and would encourage investment. The businesses would invest the money in things, such as capital or research and development, that make their company more efficient. This would expand their production ability and increase supply.
2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
Unemployment is a more obvious problem. People are not likely to acknowledge inflation unless it is extreme, as it does not have huge effects on them. Unemployment, however, does have huge effects on people and is more visible, making it more of a concern for voters.
3. “Workers’ wage gains – characterized as ‘modest’ – aren’t raising
inflation worries. Wary employers have cut jobs every month so far this
year and aren’t inclined to be overly generous in their compensation to
workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
No, this would likely counter the self-correcting ability of the economy. Wages are the price of labor; higher wages mean that businesses will demand less labor. This will further increase the unemployment, preventing the economy from self-correcting.
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@ KangSan Keum:
I agree with your answers. I think that because of what you said, unemployment is a more visible problem, which helps to make it a bigger concern for voters.
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# Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
Lowering interest rates result in increased intensives to save and/or borrow money because of the decreased return on savings as well as the decreased cost on borrowing. Increasing profits will be beneficial in the long run when interest rates climb again. The incentive to spend increases a firms investment in the factors of production. Increasing demand for capital in a tertiary business creates multiple levels of increased profits and spending as well as increased jobs. (A trickle down effect.) An increase in jobs is also present at the top, but not as great comapred to the increase further down the line.
# Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?'
The fact that it is an election year very much matters. People, who are unemployed and know the government made policy, which left them that way, will not vote for that party/person. An election year is full of making promises and improving the lives of people in the short run (ie before the election.) Increasing employment was a higher priority because those who are employed can better afford the high prices while lowered prices with high unemployment still results in goods which are too costly.
# “Workers’ wage gains – characterized as ‘modest’ – aren’t raising
inflation worries. Wary employers have cut jobs every month so far this
year and aren’t inclined to be overly generous in their compensation to
workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
The economy will self correct as eventually cuts will leave too great a percentage unemployed and create a huge gap between the upper class and the rest of the population. The demand of the upper one percent will not be enough to sustain businesses which will have to cut down on salaries and begin to hire workers who will work for a lower salary than those previously employed. It will be a change in the group of people employed. The extrememly wealthy will continue to spend and be able to find work elsewhere or live on savings for a short period of time. However, the economy will ultimately correct itself. (Perhaps in the extreme long run.)
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1. Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
Lower interest rate means the cost of money is lower so that leads to increase in cost of borrowing. Investments will rise due to this. As there is more chance for loans and mortgages, people will not save but rather consume; increased consumption. Therefore, it will shift AD to right causing increase in demand in the long run. Also from supply side, since producers will have lower cost of production that will result in more effective and high productive firms.
2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
Increasing employment is of a higher priority is a promise that government makes before elections; lower unemployment is what consumer wants and if it is promised, they will vote for that party. However, in the long run, after elections the policies will talk and promises will be delayed.
3. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
It is not likely in the long run because wages extend the gap between rich and poor by causing unenqual distribution of wealth. That is a downfall for economy. Also since wages rise, it will trigger a decrease in disposable income therefore increase in prices. That will lead to decreasing AD; growth will fall; economy is not doing well.
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1.Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
low interest rates are clearly a demand-side policy will increase investment which leads consumption to increase.
2.Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
Increasing the employment rate will be important to policy makers, because the positive sides of reducing unemployment are more visible. In election time the politicians will be looking for some support so this is important during the election times. Politicians are generally making some offers for gaining more votes. They will generally promise for reducing the unemployment rate and by this they think they can get over the recession. Lowering interest rates does not have such an immediate effect.
3.“Workers’ wage gains – characterized as ‘modest’ – aren’t raising
inflation worries. Wary employers have cut jobs every month so far this
year and aren’t inclined to be overly generous in their compensation to
workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
If wages continue to rise even as unemployment rises, it is that the US economy will never "self-correct" from in times of an economic slowdown. We can consider wages as the price of labor in the labor market. When the price of labour increases the quantity of demand will decrease which means the unemployment will continue to rise. So we cannot say that the economy will self correct itself.
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To Nesibe Z?rzak?ran
I liked your comment about the third question where you talked about the long run effects.
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1. Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
Lowering interest rates is very important as it helps promoting investment and increasing money borrowing. Both of them can increase consumption and production. Firms can use the money on technology, labor and capital to minimize their cost and maximize their production. And when consumers can borrow more money they have more ability to spend on goods. So this way consumption which means demand can increase. Also when there is increase in demand it can encourage firms to increase their production as well.
2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
Employment is an important issue because employees are the key of production. So increasing employment means more production which is a good thing for economy. When there is more employment, there will be more demand as people have jobs and get money from it. And also by increasing employment there will be more production. So at the same time there will be both more production and more demand. As there will be an increase in aggregate supply it will also help lowering price and controlling the rate of inflation. So instead of directly bringing down the inflation, increasing unemployment means succeeding two things at the same time: controlling inflation and decreasing unemployment. Moreover, of course it can be seen as an election tactic but I think to develop welfare of a country by controlling inflation and unemployment at the same time is a priority. Because if there is high unemployment, even if there is low inflation rate it means nothing if nobody has money to spend on goods because of unemployment.
3. “Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
I think it is so unlikely that the US economy will self correct. There is rise in inflation and increasing unemployment at the same time. That means prices are getting higher, whereas people do not have enough money because of high unemployment. So there is very low aggregate demand in the US. In order to fix this, Government should increase demand in the market by some actions like injecting money, increasing employment and trying to lower inflation by some policies.
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@Dilan Gunes
As you said, increasing employment is a good way to take attention in election times. But I think it is more than that because it really helps economy to get better by providing an increase in supply and demand at the same time.
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1-)Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
Low interest rates increase investment. As a result of this consumers will consume more.
2-)Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
I think this is a good thing for people. Because increasing employement rate means less unemployement rate. There will be less people who aren't working for a job. This situation is good for policy-makers because during election period most of the politicians promise to decrease the unemployement rate. By these promises they can get more votes. They think like this they prevent recession.
3-)“Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
Wage is the money that one worker takes for his/her job. Actually here we can call wage as price of labor. Quantity of demand decreases as a result of increasing labor prices. By this unemployement rate will be still increasing. Finally if we consider these situations we can say that economy will not be self correcting itself.
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@Talia
I liked your opinions for all questions but in 3rd question if you talked about the quantity demand it would be better but it is still good.
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1. Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
Low interest rates are clearly a demand-side policy increases investment so consumption increases.
2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
Increasing employment is an important policy, because positive sides of reduction unemployment are have an important role. This policy is suitable for government in order to select for new elections because increasing employment rate is the most visible thing in order to satisfy the society. Also with this way it is easy to get over the recession and to fix the economy but not in a long-run.
3.“Workers’ wage gains – characterized as ‘modest’ – aren’t raising
inflation worries. Wary employers have cut jobs every month so far this
year and aren’t inclined to be overly generous in their compensation to
workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
When wages continue to rise, US economy will never “self-correct” from in times of an economic slowdown. If the price of labour increases then unemployment will not stop rising. So the economy will not “self-correct” itself.
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To Dogancan,
I liked your answers to the questions especially your opinions to the 3rd question.
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1-Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
It is clear that low interest rates are clearly demand-side policy because they encourage people consumption and investment. Since the interest rates are lower, producers will start to loan money from banks and start investing for technology or new capital. This process can be result in more employment so it can decrease the unemployment rate.
2-Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
Increasing employment is of a higher priority to policy-makers than bringing down the inflation rate, because when the employment rate increases, the production will also increase. Politicians also see that unemployment is an obvious problem for citizens, since the party which has more solutions to social problems will be chosen; politicians will give more importance to unemployment.
3-If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
If inflation and unemployment are high at the same time, it is not likely that the US economy will self-correct. In a situation like that the government should use policies in order to increase aggregate demand, because the rate of it will be too lower.
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@Asucan, You said unemployment is also a good way of solving economic problems not just for election. But I think that its reasults are visible in the just short-run, to solve economic problems really inflation should be first thing.
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Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
Lowering the interest rates result in a positive supply-side effect for the economy because more investors will enter the economy. This new investors will make increment the supply of the economy.
Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
Increasing employment is a higher priority than bringing inflation rate down because if people do not have liquidity to buy products they do not care of inflation.
“Workers’ wage gains – characterized as ‘modest’ – aren’t raising?inflation worries. Wary employers have cut jobs every month so far this?year and aren’t inclined to be overly generous in their compensation to?workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
If wages continue to rise even as unemployment rise the economy of the country will not “self-correct”. Maybe the demand in the short run will increase but in the long run the gap between the poor, middle class and high class.
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Hi Ozge_Elif_Ozer, I agree with you I believe that the country should intervene in the economy to shift the aggregate demand of the economy. Some fiscal and monetary policies could be use to reduce unemployment and inflation.
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1. Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
When the government makes interest rates low as a demand side policy which can be stated as contractionary monetary policy, people especially investors will start to get loans from the bank. As a result of that, the investments for education, technology, health will increase. By the help of that the there will be job opening. It makes unemployment rate decrease.
2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
When we look at the Philip curve, we may see that there is an inverse proportion between inflation and unemployment rate. When unemployment decreases, it is possible to see that inflation is increasing. In the election year, the politicians generally prefer to stabilize unemployment. I mean by stabilization generally decreasing the rate of unemployment.
3. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
In my opinion, that situation is a bit impossible to take place. Because wages do not rise immediately, while unemployment rate is rising. But let say it happened, it has a government intervention and a supply side policy rather than a demand side one.
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@ozge elif
Hi Özge you mentioned a very good point by talking about policies in order to reduce unemployment.
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- Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
Lowering interest rates could be considered a supply-side changes to the economy because all businesses borrow money. If the interest rates are lower, that means that the firm isn't spending as much on interest, therefore lowering its costs. Also this idea of lower costs can apply to other things as well, such as government borrowing. This would allow for possibly more investment in education, etc.
- Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
I think that having people in a job is much more important to policy makers than inflation. This is because if people are unemployed, they are much more likely to be unhappy (because they are bringing in no money, and all of the other negative effects of unemployment such as lower self esteem etc.) than if they just have less spending money than normal. Some money is better than none at all. This makes the policy-maker look really good in the people's eyes. The fact that it's an election year means that candidates will do anything to get every single piece of popularity they can.
- If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
I don't think so. If wages rise as unemployment rises, that means that there will be an even greater gap between the rich and the poor. Also, unemployment isn't a bad thing all on its own, there are a whole lot of other things attached to it, that can also be detrimental to an economy. Because there are all these people who are out of a job, not only does that mean that they are not paying taxes, but it means that they are likely to be collecting on some sort of social security thing from the government. This in turn means that despite there may be a few people who are better off from increased wages, the economy as a whole will continue on its downward spiral.
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@Dogan_Can_Ozcan
Yes, your answer to number one is sort of correct, but there is more to it than that. The reduced interest rates make it so people/firms can borrow without paying as much in interest. That reduces their overall costs, which is what makes it supply-side.
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Lower interest rates could benefit the supply-side because firms would be able to take out loans at lower price and invest in capital goods. This has long-run benefits, as capital equipment constantly needs to be renewed. The efficiency may be improve and therefore an increase in aggregate supply.
Increasing employment is of a higher priority to the government because the social unrest caused by unemployment is usually more serious than that caused by inflation.
Yes. The increase of wages would make it even harder for unskilled workers to find jobs. Whereas the educated workers would live better lives. As unemployment rises, wages should go down in order to allow lower skilled workers to find lower paid jobs.
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@masayaechlf09,
I aggre that there should be increase in flow of information in order to let more people find jobs. However, the larger protion of the unemployed is unskilled workers which do not have the required ability to work for certain jobs. I think devceloping training center is a better way to solve unemployment..
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1. Although the changes in interest rates would affect the demand-side policy, it could also have a benefit and have a positive impact on the supply-side policies for the economy. Generally supply-side policies consist of actions that would reduce barrier for firms to operate in a market and improve the economy (as well as it would also increase the quantity/quality of the factors of production). For example if interest rates are low, firms are able to invest more money to increase output (quantity). As well as they are able to spend money on things such as education and training for their employees to increase the quality of their outputs.
2. I would strongly think that election year would matter a lot when it comes to things such as unemployment, as people generally want changes or improvements to make things better. If there is a large case of unemployment, people are likely to want change and reduce it. However the main reason would most likely be that problems with unemployment could easily be fixed (in a shorter amount of time), whereas inflation cannot be controlled as easily.
3. It is very unlikely that the US economy will ever “self-correct” over a period of time when there is an increasing unemployment and inflation chasing the economy, without any government intervention. Either one of the two problems could correct it but that would have disadvantages in many different areas. For example if the US economy were to fix only inflation, which would lead to a decrease in aggregate demand (and again, unemployment would keep increasing and vice versa).
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To: Huanni_Wu
For your second response, I do agree with you and get your point. However I would not think that unemployment issues are more ‘serious’ than inflation, as you would say. Simply because if inflation rate does become very high, that would most likely be a ‘serious’ issue. I would think that things have to be in moderation more than anything, which would be a very hard thing to do in a situation where both unemployment and inflation is increasing…
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Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
Lowering interest rates result in a positive supply-side effects for the economy by several reasons. One of these are that when the interest rates are low, the investors start to invest in what they want. This is because they would like to have the greatest invension, and this would be by first, introducing the invension at a low interest rate, and gaining a lot from it. Then, another reason is that the low interest rates, depending in how low they are, the loses or what you win from it are determined. If the low interest rates are very low, then the loses would be much greater. If the low interest rates are not as low, then what you win won't make a big difference as if the rates were not low.
Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
Increasing employment is of a higher priority to policy-makers than bringing down the inflation rate because you can create jobs in a short period of time. On the other hand, inflation recuires a longer period of time for adjustments due to the fact that inflation measure the overall change in prices for a specific period of time, say one year. It is difficult to decrease inflation because the different markets of the different products can behave in many different ways.
“Workers’ wage gains – characterized as ‘modest’ – aren’t raising
inflation worries. Wary employers have cut jobs every month so far this
year and aren’t inclined to be overly generous in their compensation to
workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown.
It won't self-correct, there are several reasons of why not. First of all, the people who aren't working don't recieve or have money. The purpose of economy is to maximize the happiness of the people. With this example, it is making happier the lives of some people, but other are not, and the purpose is that everyone achieves it's welfare.
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@Tomoya:
I agree with your third point. It's obvious that the US economy will never “self-correct” over a period of time when there is an increasing unemployment and inflation chasing the economy, without any government intervention. It is absurd to think that the economy will self-correct if people are unemployed and not recieving money. This won't maximize the well-being of the people, and the economy's purpose is to maximize the well-being of the citizens.
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1. Low interest rates are clearly a demand-side policy, since they should lead to higher investment and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
This will increase employment, which will lead to a shift to the right in supply curve, because of the having more efficiency in companies’ works. This will be caused by low interest rates, because when there is low interest, people will want to have job.
2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
The election year is definitely an effect of lower unemployment rates, because by this way politicians get votes easily. Plus, if people cannot find a job, then they would be unsatisfied; that’s why GDP will decrease.
3. “Workers’ wage gains – characterized as ‘modest’ – aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
According to the Neo-classicists sayings, when wages get so high that many people will want to find jobs, the unemployment rate will be in equilibrium. As time passes economy will self-correct.
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