Inflation Unemployment and the Fed

Technology changes, net investment that enhance productivity improvements, and positive institutional changes tend to increase the aggregate supply in both the short-run and long-run. For instance, institutional changes like providing the public goods at lower prices will increase the efficiency in economy and lead to a shift of the aggregate supply curves to the right. When the aggregate demand is more than the value of output at the full employment level an inflationary gap is created in the economy. Inflation can either mean an increase in the supply of money like the printing of more money by the government, or an increase in the levels of price of money. When the money supply increases, then the prices of the products and prices will also increase since there is abundance of “easy money” that encourages people to spend it very fast.

5% for every percentage point of the GDP that is above 2. 5% (Appelbaum, 2016). Theoretically, this sound like a perfect way that can be used to kill two birds with one stone as the overall GDP increase tends to lower the rate of unemployment. Unluckily this encouraging relationship breaks down when the rate of unemployment goes below 4%. For the U. Higher inflation rate has an exponential effect on prices of products and it quickly erodes the buying power of the consumers. In turn, this slows down the economy, reducing GDP, and increasing rate of unemployment. It is crucial to maintain the delicate balance between the three pillars of the economy comprising of GDP, unemployment rate and inflation rate. The balance is maintained by the Fed and it keeps the economy churning.

Tools used by Federal Reserve in Controlling Inflation The Federal Reserve’s primary task is to control inflation while at the same time avoiding a depression. The Fed will buy securities whenever it needs the commercial banks to have more money to lend, and it sells the securities by forcing these banks to buy. When the banks buy the securities from the Fed, their capita is reduced, leaving them with less money to lend (DC hold’em, 2016). As a result, the banks will charge interest rates that are higher, thereby slowing the economic growth by mopping up inflation. The Fed may also increase the reserve requirement (Appelbaum, 2016. This refers to the amount that banks are required to keep as their reserve at the end of each day.