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Ramifications of unemployment

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Some people believe that 0% unemployment, where everyone who wants a job, has a job and 0% inflation, where prices remain the same year after year, are ideal policy targets for the U.S. economy. Would you recommend a policy target of 0% unemployment and 0% inflation? What implications would these policies have on the economy and specifically your personal and professional life?

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Solution Summary

Ramifications of unemployment are presented in this solution. References are also provided to further validate the findings.

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It is highly agreed among economists that high inflation rates are disruptive. Economies with high inflation rates tend to have lower growth rates than economies experiencing lower rates of inflation. This is largely due to the increased uncertainty about future income and prices that accompany higher inflation rates. Consequently, most economists agree that inflation rates should be relatively low but there is less consensus about whether an inflation rate of 0% is better or worse than an inflation rate of 3%.

During the 1950s and 1960s, economists would have suggested that a positive inflation rate was desirable because this period was characterized by a relatively stable inverse relationship between inflation and unemployment rates. This relationship, known as the "Phillips' curve," suggested that the opportunity cost of less inflation (moving from I1 to I2) was higher unemployment (moving from U1 to U2). In this scenario, policymakers could use monetary and fiscal policy to select whatever combination of inflation and unemployment was perceived as being most desirable.

During the 1970s and early 1980s serious doubt on the validity of the Phillips' curve relationship of inflation and unemployment arose. Supply shocks, induced in large part by the OPEC oil ...

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