Unemployment and INflation

Unemployment and INflation

In Chapter 4 of The Little Book of Economics, Greg Ip talks about the natural rate of unemployment as the rate of unemployment that will not lead to an acceleration in inflation. Keep this reading in mind as you respond to this week’s discussion question.

Think about this:

If the current unemployment rate is 3.7%, would you expect the rate of inflation to increase or decrease? Explain your answer.
Special Note- you have to determine how a low unemployment rate can affect inflation. Should you expect it to accelerate or not. Typically, when unemployment is low, inflation tends to rise. You have to do some research to see if this is the case today and how experts explain todays relationship between unemployment and inflation.

Solution Preview

Unemployment and Inflation

The rate of unemployment is expected to rise in the coming years, nevertheless, the inflation rate may remain constant since the relationship between inflation and unemployment is not directly proportional. The connection between unemployment and inflation has conventionally been a converse correlation.

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