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How Would You Explain a Simultaneous Rise in Unemployment and Prices in an Economy?

In: Business and Management

Submitted By pepsieconomics
Words 2598
Pages 11
Controlling the level of inflation and achieving close to full employment are both major macroeconomic policy objectives which governments try to achieve. Stagflation is a period when there is a persistent rise in prices and slow economic growth. Slow economic growth implies that there is a rise in unemployment as the economy is not working at its full potential. As part of their objectives, governments aim to lower unemployment and try to keep prices stable but when there is stagflation, conflicts tend to occur as policies intending to lower inflation can cause output to fall further. This essay will evaluate the causes of such an occurrence happening and what governments can do to resolve such problems, referring to current economic events.

Governments are generally happy when there is a low level of inflation. A ‘creeping inflation’ can be connected with high profits and general business optimism. (Powell 2009:272) argues that this “maybe a necessary side-effect of expansionary policies to reduce unemployment.” Although when inflation rates are unanticipated and go out of control, the costs of inflation become more apparent. Rapid changes in prices lead to money-functions being non-existent and bartering starts to replace transactions. Normal economic behaviour is distorted too as household bring forward purchases if they expect inflation to increase further. As mentioned earlier unemployment is considered to be bad for an economy. This is shown in Graph 1 at point D where the economy is working within its Production Possibility Frontier (PPF). There is a waste of scarce resources which affects the growth potential of an economy. This is why governments try to implement policies to avoid these two problems from happening.

Stagflation first occurred in the 1970’s when there was rising inflation and there was a slowdown in the growth in the UK. In 1975…...

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