Unemployment and Inflation
Two of the biggest issues in macroeconomics are inflation and unemployment. Policymakers would like to keep both measures low. Often, however, there is a trade-off between the two. A strong economy that lowers unemployment can put upward pressure on prices. A weak economy that lowers inflation can increase unemployment.
Before the COVID-19 pandemic, we had both very low unemployment and inflation. Then unemployment rose. In the future, unemployment and inflation could change and it’s good to have policy plans in place before either of these problems gets too bad.
Imagine that you oversee macroeconomic policy. Answer these questions, being sure to explain your answers.
- What are some of the problems, difficulties, or hardships caused by unemployment?
- What are some of the problems, difficulties, or hardships caused by inflation?
- If you had to make a choice today between a policy that would head off increases in inflation or increases in unemployment, which one would you choose?