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Inflation and Unemployment The President of Bartavia is being advised on economic policy by you, his economic advisor
Inflation and Unemployment The President of Bartavia is being advised on economic policy by you, his economic advisor. Assume that Bartavia is very close to the full employment level (resources are almost all fully employed in the economy) but the President of Bartavia is still worried about unemployment. Therefore he wants to enact some expansionary fiscal policy. How would you explain the logic of a potential short run trade-off between unemployment and inflation to the President in other words, why might there be an inverse relationship between unemployment and inflation over the short run when the economy is very close to tell employment and no technological advances are occurring simultaneously? Develop a response that includes examples and evidence to support your ideas, and which clearly communicates the required message to your audience Organize your response in a clear and logical manner as appropriate for the genre of writing. Use well-structured sentences, audience-appropriate language. and correct conventions of standard American English
Expert Solution
Expansionary fiscal policy work by either reducing tax rates or increasing government expenditure. Both of them work by shifting AD curve to the right, leading to an increase in both RGDP and price level.
As RGDP increases, production in the economy increases, leading to increased employment of resources and reduced unemployment. However, on the other hand, as prices increase, it leads to inflation in the economy.
This shows how there exists a tradeoff between inflation and unemployment in the short run. This is because as unemployment reduces and employment increases, more is produced in the economy, which means more workers are being employed and thus making wages. This increases worker purchasing power, leading to increased AD of goods and services, leading to inflation.
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