Outline the causes of both unemployment and inflation. Explain policies available to the government to combat these two economic issues.
Unemployment and inflation have many different causes and the levels of have had severe fluctuations over time. Unemployment and Inflation can be caused by many different things but normally they follow the business cycle with high inflation in times of boom and high unemployment in times of recession. The government can use two different policies to either expand or contract economic activity resulting in low or higher inflation or unemployment.
Inflation is caused by many different things, all resulting back to an upswing of the economy so most of the time inflation in high in recessions and low in booms. Inflation is measured by the CPI which measures the changes in the price of a fixed basket of goods and services acquired by household consumers, so you can see how much you can get for your money and measure inflation. There are three main causes of inflation: Increase in consumer demand (demand-pull inflation) , increase in the cost of producing goods (cost-push inflation) and increase in the price of imports (imported inflation)
One cause of inflation is demand-pull this happens when demand for a product becomes faster than business can increase there output this means that there will be shortages which will forces the price up and your purchasing power down. Demand pull inflation normally occurs when the economy is growing quickly
Another cause of inflation is cost-push inflation. This is when the increase of the price of something used to make the product increases meaning that the products price will be forced to increase. For example when oil rises all the products that are made with oil are forced to increase like petrol and plastic. Other inputs such as business cost and wage increases also affect to cost-push inflation.
Imported inflation is when an increase in another country will mean the...
Please join StudyMode to read the full document