Relationship Between Short-Term Unemployment and Inflation? What Cause Inflation?

Topics: Inflation, Unemployment, Keynesian economics Pages: 4 (1304 words) Published: January 3, 2013
5.What is the Relationship between Short-term Unemployment and Inflation? What cause inflation?

Inflation refers to a rise in prices that causes the purchasing power of a nation to fall. Inflation is a normal economic development as long as the annual percentage remains low; once the percentage rises over a pre-determined level, it is considered an inflation crisis. There are many causes for inflation, depending on a number of factors. For example, inflation can happen when governments print an excess of money to deal with a crisis. As a result, prices end up rising at an extremely high speed to keep up with the currency surplus. This is called the demand-pull, in which prices are forced upwards because of a high demand. Another common cause of inflation is a rise in production costs, which leads to an increase in the price of the final product. For example, if raw materials increase in price, this leads to the cost of production increasing, which in turn leads to the company increasing prices to maintain steady profits. Rising labor costs can also lead to inflation. As workers demand wage increases, companies usually chose to pass on those costs to their customers. Inflation can also be caused by international lending and national debts. As nations borrow money, they have to deal with interests, which in the end cause prices to rise as a way of keeping up with their debts. A deep drop of the exchange rate can also result in inflation, as governments will have to deal with differences in the import/export level.

Inflation Unemployment on wiseGEEK:
* When governments implement macroeconomic policy, they’re generally interested in preventing or controlling economic trends like inflation orunemployment that can harm large portions of their populations.

* When prices are too high for consumers to purchase goods, businesses begin to fail. Unemployment will increase as companies begin laying off workers. This reduces the demand for goods as consumers...
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