The Role of Macroeconomic Policy in Reducing Unemployment and Inflation

1Q. Unemployment Types

For each economy, it is important to reach the decision with the help of its production curve of opportunities and make the best efforts for it. Additionally, factors in economy have to be completely occupied. Inability to use these factors brings a threat of making the wrong decision in a production curve of opportunities. This way, the company cannot achieve the level of production which it is able to make (Rittenberg 2009).

Basically, unemployment can be divided into voluntary unemployment, unemployment when people left their last work and now search for a new one, and inadvertent unemployment when people dismissed from the previous employment want to find work in other place. It is not surprising that an economist usually considers inadvertent unemployment as a more serious problem than voluntary unemployment, because it reflects that decisions of house farms maximize usefulness (Rittenberg 2009).

Frictional Unemployment

Job search implies considering time and sometimes reasons. The person loses job opportunity, because he/she waits until finding the job which works for them or takes time to choose between the repeated offers of work. Besides, interview with employers who decide which person they want to employ also takes time. Frictional unemployment is defined as voluntary, because it comes from the demanded consent of time for the candidates for open positions. The example of frictional unemployment is a voluntary holiday when one takes a day off to find another (Rittenberg 2009).

 

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Structural Unemployment

The structural unemployment is caused by discrepancy between the needs of employers and the skills of work for the country (Mankiw 2014). For example, law schools in the USA are based more on lawyers than the needs of the potential employees. As a result, any lawyer is able to get a job in retail shop, but he refuses to work, because there is no area of work for which he was trained. Structural unemployment can also occur because of geographical problems. For example, people wish to perform works and live in rural areas, but workplaces are available only in the city (Rittenberg 2009).

Seasonal Unemployment

Seasonal unemployment implies that people are jobless, because certain types of workplaces are available only during certain seasons. For example, the person who cleans snow on the roads can work only in winter, and the rescuer can work only in summer when it is warm outside. Another example is demand for post workers that usually increases during holidays. Seasonal unemployment occurs simply because of the decline in demand for goods or services during certain seasons. The most predictable type of unemployment is seasonal unemployment, because it occurs every year (Rittenberg 2009).

Cyclic Unemployment                                                                

This unemployment type is caused by recession in economics about which people often hear in news. Cyclic unemployment can be caused by negative economic growth. Additionally, it is described as if there are sufficient requirement and workplaces delivery among the inhabitants. Such a type of unemployment is able to lead to high unemployment rate in the country (Rittenberg 2009).

2Q. Introduction to Macroeconomic Development

The developed economy defines the country with the healthy income per capita and low abundance. Its citizens enjoy a high standard of living, opportunities for education, and access to appropriate medical care. The developed economy in industrialized countries is measured by gross domestic product which usually develops good versatility.

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The most part of macroeconomic development is export of goods from the countries with developed economy around the world. These areas that are operated by banks, financial and political systems as a rule remain stable and promote growth and productivity. The people in a country with the developed economy usually live longer, because they have access to quality health care and appropriate food. They are qualified and educated workers who earn a worthy salary (Froyen et al. 2005).

The countries with poorly developed economy are often overshadowed by the developed countries and thus face a problem of poverty and lower life expectancy. Workers, as a rule, lack skills or training leading to the reduction of their revenues (Froyen, et al. 2005). The governments of these countries do not have appropriate resources for education, health, or new infrastructure (Froyen et al. 2005).

The rate of inflation depends on the price levels and income of population. Less developed economies are often characterized by high abundance, lack of control over birth rate, and poverty. In some areas, citizens have no pure drinking water and appropriate food which leads to premature death. The main source of income in these countries is often agriculture that is the reason of the import of the necessary goods. The countries within this classification can face political instability and high crime rate (Mankiw 2014).

3Q. The Role in Reducing Inflation and Unemployment

Scientists consider financial rates, exchange rates, and monetary policy in terms of macroeconomic policy. It helps with the payments’ balance, inflation rate definition, and the deficit of budget. In particular, macroeconomics helps investigate partial correlation between inflation and economic growth as well as budget deficit and economic growth (Rittenberg 2009).

For example, monetary policy can reduce inflation risks. The Great Inflation of the 1970s was commonly viewed as the biggest failure of the United States’ macroeconomic policy starting from the moment of the Federal Reserve foundation. All those macroeconomic events were rather complicated and frustrating. At that time, the latest investigations in macroeconomics were aimed at coming up with the monetary decisions. For example, such macroeconomic definitions as model building, theory of macroeconomics, and forecasting were brought to deliver the right option for monetary policy. The diagram below shows that the cost-push inflation grows with the rise of prices level, and AD2 line shows that the ability of people to buy the same amount of products decreases. Consequently, the latest scientific investigations have mastered the techniques of optimization and the role of economic advisers (Monetary Policy Rules and the Great Inflation 2002).

The latest events in the world of economics also state the need to rule macroeconomic policy in the right way since the rates of inflation grow every year. There is no need to refuse the flaws of monetary ruling. It is admitted that systematic efforts to optimize non-inflationary policy can promote employment potential of the state.

Unemployment also has caused stable losses in the sphere of services and goods. Financial policy led in an inappropriate way always results in indebtedness. Additionally, it is important since a lot of studies conducted have shown that unemployment leads to criminal activities like corruption, family disruptions, and ethnic antagonism.

It is expected that the countries with a big budget deficit and high inflation grow a little bit slower. Potential communication between inflation and growth is discussed and developed in Fischer’s hypothesis. Besides, Mandell-Tobin's effect means that based on the increase in the expected capital accumulation in inflation, a set of other mechanisms makes feedback. Negative impact of inflation on the mechanism of division of efficiency assumes that higher inflation reduces income level according to the new theory of mechanisms of growth; this interaction implies inverse relationship between inflation and growth (Rittenberg 2009).

However, all the expenses on addressing inflation consider the internal relationship between the income and inflation. These expenses impact the capital taxation. There are new theories regarding growth and inflation stating that parts of macroeconomics have a direct connection of the level and variability of inflation. Also, inflation causes uncertainty regarding future pricing levels. This uncertainty is can reduce inflation (Romer 2011). The role of inflation as the indicator of full ability of the government to operate economy is as important as the above-mentioned mechanisms. Since there are no good arguments for very high inflation, the government which allows high inflation looses control. Economic growth will be low in this economy. The same argument is the main reason to expect an inverse relationship between financial deficiencies and growth.

The governments which operate big budgetary deficiencies also get out of hand. Besides, in many models, the budget deficit is forcing out private investments. In the short term, neither inflation nor budget deficit affects growth rate. Shock of delivery will lead to lower growth and higher inflation; concerning the expenses on social needs, reduction will increase deficiency. The government can, of course, establish a rate of inflation and deficiency irrespective of growth rate during such a long period (Garcia 1996).

If growth rate of production is removed and variables of macroeconomics are added, then the budgetary surplus and inflation negatively influence the investments. Inverse relationship between inflation and a share of investments is rather high.