Navigation » List of Schools, Subjects, and Courses » Econ 102 – Principles of Macroeconomics » Discussions » Discussion 3 unemployment and inflation » Discussion 3 unemployment and inflation Sample Answers
Discussion 3 unemployment and inflation
The graph below shows US unemployment in blue and inflation in red. Is there a relationship between the two? In other words, when unemployment goes up, does inflation go down or up? Why might that occur?
Discussion 3 unemployment and inflation Answer
There is an inverse relationship between unemployment and inflation. This means that the two moves in an opposite direction. When unemployment is high, inflation remains low or the price level is almost not moving. This is because there is no pressure to increase the price because people has limited purchasing power. Sellers even usually keep the prices low or business is shutting down because of recession. On the contrary, when unemployment is low, inflation is rising because prices is increasing. People has more capacity to purchase, thus, there is a pressure to increases prices in order to prevent shortages.