Inflation and unemployment

             This analysis of the inflation and unemployment cycle is written under the assumption that people will generally spend more when their income increases .This assumption is supported with the result of our survey which shows that almost 70% of the respondent will increase their spendings when their income increase. Humans have unlimited needs and limited resources, so when their buying power increases they would spend it to satisfy their needs.

            When a country wants to grow, the government and the central bank will introduce new policies to promote growth in the country. Government’s effort can consist of activities such as increasing government spending on subsidies or development and decreasing fiscal policies. While the central bank can reduce the required reserve ratio imposed on other banks to increase money supply in the country.

            These propositions which promotes growth will also reduce percentage of unemployment as with the reduced tax and so on companies will take the opportunity to increase their productions and that will require more labour. When more people is working they will have more purchasing power which will result in high demand of products in the market, which will induce more productions and an increase in price of products. So this cycle of increasing prices, which is know as inflation because the amount of money increases but the value of it decreases, continues on.

            This will in turn cause the government to control inflation within the country as the value of their currency is dropping. In this situation the opposite of the first action is done, which is increasing fiscal policy, decreasing government spendings and the government can even sell bonds to other country. While the Central bank can impose a higher required reserve ratio on banks so that the money that they can loan to the public decreases. These actions will induce deflation or depression.

            When this occurs, the cost imposed on a company will increase and they would want to reduce their cost which leads to a reduction in their productivity. Less labour will be required and the rate of unemployment will increase. With the higher rate of unemployment and the tight monetary policy, consumers buying power will reduce and the demand for products will lessen which will cause a drop in the general price of goods.

 And this will be followed by the government’s action to promote growth again and the cycle continues on.