Inflation and Unemployment affects our economy in terms of growth in various ways. Inflation for example can be categorized in segments to see how our economic growth is affected. When you look at investments in terms of inflation as one example, if prices of goods where to rise do to inflation, people would have to spend more money having to use up what they have in savings, causing money to be less available and no longer being able to make investments.
People are only willing to invest if they have enough money in savings to pay for the investment without affecting their daily needs. To determine how unemployment affects economic growth, one way would be to look at the statistical model invented by Arthur Okun known as Okun’s law. According to Investopedia, “In the most basic form, Okun’s law investigates the statistical relationship between a country’s unemployment rate and the growth rate of its economy. (Fuhrmann)” A benefit of Okun’s law is that in a simpler term, a 1% decrease for unemployment will happen when the economy has a growth of 2%. While Okun’s law according to some economists may not be entirely accurate, it can last least be used as a starting point of discussion.
Inflation and Unemployment have a close relationship but in an inverse connection. In order to determine the most efficient rate you would have to look at the Phillips Curve. According to Investopedia, “The inverse relationship between unemployment and inflation is depicted as a downward sloping, concave curve, with inflation on the Y-axis and unemployment on the X-axis. Increasing inflation decreases unemployment, and vice versa.
Alternatively, a focus on decreasing unemployment also increases inflation, and vice versa. (Investopedia)” I would think that in our country for instance, the US government would make these decisions. However, the US government plays a limited role in our market economy. Consumers and Producers play a large role in terms of decisions for our economy.
The only roles the US government plays is stabilization and growth, regulation and control, direct services, and direct assistance.