MACROECONOMIC POLICY

 

Unemployment and Inflation

Two of the biggest issues in macroeconomics are inflation and unemployment. Policymakers would like to keep both of these measures low. Often, however, there is a tradeoff between the two. A strong economy that lowers unemployment can put upward pressure on prices. A weak economy that lowers inflation can increase unemployment.

We currently have the benefit of both very low unemployment and inflation. But things could change and it’s good to have policy plans in place before either of these problems gets too bad.

Imagine that you are in charge of macroeconomic policy. Answer these questions, being sure to explain your answers.

• What are some of the problems, difficulties, or hardships caused by unemployment?
• What are some of the problems, difficulties, or hardships caused by inflation?
• If you had to make a choice today between a policy that would head off increases in inflation or increases in unemployment, which one would you choose?