Inflation, Unemployment, and the Fed - Economics Essay Example

Published: 2022-02-22
Inflation, Unemployment, and the Fed - Economics Essay Example
Type of paper:  Research paper
Categories:  Economics Unemployment Inflation
Pages: 5
Wordcount: 1246 words
11 min read

Gross Domestic Product (GDP) refers to a nation's overall economic activity over some time, could be annually or quarterly. It is a measure of whether the economy is growing or declining. The computation of GDP incorporates investments, exports minus imports, government expenditure, and public or private consumption of goods/services. Real GDP is when the calculation has been adjusted to remove the effects of inflation. Nonetheless, Real GDP only counts final goods when evaluating the economy of a country (Ball & Tchaidze, 2002).

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On the other hand, inflation refers to the increase in prices of goods and services over a period implying a fall in the purchasing power of the currency. The Bureau of Labor Statistics surveys prices monthly and after that generates the Consumer Price Index (CPI) which accurately measures the inflation rate. Rising inflation rates usually are painful for people who save money as well as retirees as their money loses the buying power. High inflation rates are also a disadvantage to people with debts because consequently, interest rates increase.

Unemployment refers to the measure of the workforce to determine the number of jobless people but searching for one at the moment. A high rate of unemployment implies that the economy is declining and therefore, companies are sourcing for ways to save money by cutting down the labor costs. There are three categories of unemployment, and these include:

Structural - when a gap exists between the skills that employers need and the skills the employees have. An example is when a company uses new technology which requires skills that its current workforce does not possess.

Frictional - occurs when a person is transitioning between jobs. It is possible that it can take some time to find a new job after leaving the last one.

Cyclical - this is dependent on the variations of the economy. Typically, when a country undergoes recession, the unemployment rate increases and conversely when a state enters the growth period, the unemployment rate will decrease.

These three categories of unemployment sum up what is referred to as the natural rate of unemployment. It is usual for a healthy economy to experience aspects of unemployment because workers are always joining companies and later leaving in search of better jobs. The Federal Reserve statistics reveal the unemployment rate should be between 4.7% and 5.8%. All financial and monetary policymakers use the unemployment rates to gauge the status of the economy. They also use 2% as the target inflation rate. Lastly, they consider the ideal GDP growth rate to be between 2% and 3%. They must work towards balancing these three goals whenever they are tasked with the job of setting interest rates, tax rates, and spending levels (Ball et al., 2002).

Aggregate supply refers to the number of goods/services which companies (in a whole economy) plan on selling during a specific time. The aggregate supply curve shows the quantity of the Real GDP that is produced by the economy at different levels. The curve will slope up because when the price for output increases while the price of inputs stays fixed, the chance at higher profits sparks higher production (Blanchard & Quah, 1988).

Aggregate demand refers to the total demand for all final goods/services (in a whole economy) for a specific period. The demand curve is vertical since the amount of goods/services is constant regardless of the price level. The real GDP depends on the supply of capital and labor to turn resources into goods/services (Blanchard et al., 1988).

Recessionary Gap refers to the gap between the current level of Real GDP and the potential production (full employment) when the Real GDP is less than potential. Because of the high rate of unemployment in the market, then the unemployed tend to settle for a lower wage rate to acquire employment. Lower wages tend to lower the aggregate supply curve and cause the price to decrease hence leading to lower prices.

Inflationary Gap refers to the gap between the Real GDP and the potential production (full employment) when the Real GDP exceeds potential. Because the rate of unemployment is less than that of the employed, employers are forced to offer higher wages to attract workers. Higher wages decrease the aggregate supply, thus raising the prices. Higher prices consequently result in lower consumption.

"The Federal Reserve System, also known as the Fed, refers to the central bank of the United States" (Ball et al., 2002). They are in charge of influencing the money as well as credit conditions of the economy, regulating other banks, maintaining the stability of the financial system, and providing service to the US government in overseeing the payment system. The Federal Reserve has two objectives, referred to as the "Dual Mandate." These include maintaining price stability and attaining full employment. Furthermore, the Fed uses a variety of tools to achieve these objectives. Some of these tools involve setting the reserve requirements; which refers to the process of controlling how much money banks must hold as compared to the deposits, they indulge in open market operations through the buying and selling of federal government bonds, and they operate the discount window plus other credit facilities by acting as lenders to other banks.

The expansionary policy is one employed by the Fed, and this policy tries to increase/expand the monetary supply in the market in an attempt to encourage growth and eliminate price increments. Tax cuts, as well as aimless government spending, are the crucial aspects of this policy. On the other hand, the Fed employs the contractionary policy, which tends to decrease the money supply in an attempt to regulate inflation. Occasionally, this policy bears unintended consequences such as slow economic growth as well as an increase in the unemployment rate.

Besides the critical concepts discussed above, there are two articles that you need to familiarize with in preparation for your debate.

DC Hold'em"DC hold'em." The Economist. The Economist Newspaper, 28 Apr. 2016. Web. 17 July 2017. <>

"This article discusses the recent action taken by the Fed to raise the interest rate from close to zero for over eight years up to between .25% and .50%. At the time of the increase, the Fed indicated that there could potentially be four more increases in the rate during 2016. Due to concerns on Wall Street, a weak labor market, and increasing inflation, however, it appeared as if that plan would not occur. The article implied that there is a 33% chance of no new rate hikes at all in 2016" (DC hold'em, 2017).

Fed Slows Down On Plans

Appelbaum, Binyamin. "Fed Slows Down on Plans to Pursue Interest Rate Increases." The New York Times. The New York Times, 16 Mar. 2016. Web. 17 July 2017. <>

"A second article that details the Fed is rethinking its original plan to raise the interest rate. The Fed made it clear that due to the market turmoil on the global stage, they are only delaying the interest rate increase and not altogether scrapping the plan. The Fed faces a hard choice to raise rates when other banks are still focused on "aggressive stimulus campaigns." Also, the markets are doing part of the Fed's job by increasing borrowing rates creating tighter controls" (Appelbaum, 2017).


Ball, L., & Tchaidze, R. R. (2002). The Fed and the new economy. American Economic Review, 92(2), 108-114.

Blanchard, O. J., & Quah, D. (1988). The dynamic effects of aggregate demand and supply disturbances.

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