Unemployment and inflation are an economy’s two most important macroeconomic issues. The federal...

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Unemployment and inflation are an economy’s two most important macroeconomic issues. The federal government’s fiscal policy and the Federal Reserve’s monetary policy try to maintain both a low unemployment rate around a natural rate and a low inflation rate around 2%.
Please write a paper to answer this question with at least 2 minimum scholarly sources for each answer.
· Evaluate the historical relationship between unemployment and inflation. (hint: You may start from A.W. Phillips’s finding of the relationship between unemployment and inflation.)
· Distinguish between the short-run and the long-run in a macroeconomic analysis. Why is the relationship between unemployment and inflation different in the short-run and the long-run?
· Assess the recent 20-year U.S. unemployment and inflation data. Do the cu
ent U.S. unemployment and inflation data confirm the short-run Phillips curve?
· Analyze why the recent 20-year U.S. unemployment and inflation data approves or disproves the short-run Phillips curve.
· Evaluate whether the Phillips curve can still validly resolve today’s issue of unemployment and inflation and forecast unemployment and inflation. Why or why not?
· Recommend any policy, method, or opinions for the cu
ent U.S. unemployment and inflation as a policy maker for either fiscal policy or monetary policy (or both).
The Short-Run and Long-Run Relationship Between Unemployment and Inflation Final Paper

macro203-gocsbzj1-pttbb4rq.docx

Harshit · Accepted Answer

Answer to Q 1
According to A W Phillips there is an inverse relationship between unemployment and inflation. This means that when the inflation (with regard to labour the wage rate of labour increases) increases the unemployment decreases. But this trade off will happen only in short run and will cancel off in the long run. The curve that represents the relationship between unemployment and inflation rate becomes a straight vertical line in the long run (Gordon, R. J. (1988)) There has been a certain times when both the unemployment and the inflation raised has increased such as stagflation in the year 1970 and in the case of great recession both the unemployment rate and the inflation rate decreased. The inverse relationship between unemployment and inflation is logical as well because when there is higher unemployment people have less money to spend their for their purchase few items. When the Purchase is less it means that the demand of product is also less and lower demands pressure rises the price to go down. As prices decrease the inflation also decreases (Leeson, R. (2000))
Following the diagram of the Phillips curve:
Short Run Phillips Curve
       Inflation			
Unemployment	
	
Answer to Q 2
As the labours will get higher nominal wage rate in case of unemployment but the inflation will rise faster and when the workers realise that the wage rate is lower again they will be unemployed therefore at Higher inflation the level of unemployment cannot be reduced and will remain constant are the natural rate of unemployment. In the short run if we take two points on the philips curve we can see that when the unemployment shifts from right to left which means the unemployment rate decrease is the rate of inflation increases. This relationship will happen only in the short term (Leduc, S., & Liu, Z. (2012)) In the long run the non-accelerating rate of unemployment and the Phillips curve represent that an economy starts with a very low level of inflation which tries to decrease the rate of unemployment but the same will only be decrease to a certain level as the rate of unemployment cannot fall below the natural rate of unemployment or the long run Phillips curve.
	Long Run Philip Curve
       Inflation			
	Short run Philip Curve
	Short run Philip Curve
Unemployment
Answer to Q 3
The following is the historical rate of unemployment and inflation in the United States in the past 20 years.
	Year
	Unemployment Rate
	Inflation
	2001
	5.70%
	1.60%
	2002
	6.00%
	2.40%
	2003
	5.70%
	1.

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