All nations that aspire to achieve a balanced and prosperous economy have three main objectives in common: to expand the gross domestic product (GDP), keep unemployment low, and maintain stable prices overall. According to one of the ten principles of economics, every society faces a trade-off between the last two — unemployment and inflation — meaning that it is impossible to completely eliminate one without causing the other to grow exponentially. The purpose of this essay is therefore to determine which side in this inverse relationship is the lesser of two evils. By examining unemployment and inflation individually, we will see that it is in Bartavia’s best interest to pursue an expansionary fiscal policy in order to maintain full employment,
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Before we assess the costs of this strategy, we must first define what it means for an economy to possess full employment. It implies that all available resources and capital are being fully utilized. However, it does not mean that there are no jobless individuals within that same economy. It is important to highlight that unemployment can never equal zero because it constantly fluctuates around its natural rate, even when the economy is doing well overall. Structural and frictional unemployment are inevitable in every economy to some extent. Therefore it is not realistic to strive to fully eradicate unemployment in Bartavia. Nonetheless, as stated previously, favoring low unemployment will lead to a higher rate of inflation. Let us examine the costs. High inflation robs people of their purchasing power. Each dollar they earn depreciates in value. This, in turn, discourages investment, which may have a negative impact on the overall economic growth. Another factor to consider is menu costs. When price levels rise it usually takes time for firms to change prices, because the adjustment itself is costly. Despite these disadvantages, inflation at least has some beneficial outcomes — which is more than what can be said for unemployment. When prices rise, the sellers of goods and services can make a greater profit. Wages will most likely increase and people can manage their debts more
Before we assess the costs of this strategy, we must first define what it means for an economy to possess full employment. It implies that all available resources and capital are being fully utilized. However, it does not mean that there are no jobless individuals within that same economy. It is important to highlight that unemployment can never equal zero because it constantly fluctuates around its natural rate, even when the economy is doing well overall. Structural and frictional unemployment are inevitable in every economy to some extent. Therefore it is not realistic to strive to fully eradicate unemployment in Bartavia. Nonetheless, as stated previously, favoring low unemployment will lead to a higher rate of inflation. Let us examine the costs. High inflation robs people of their purchasing power. Each dollar they earn depreciates in value. This, in turn, discourages investment, which may have a negative impact on the overall economic growth. Another factor to consider is menu costs. When price levels rise it usually takes time for firms to change prices, because the adjustment itself is costly. Despite these disadvantages, inflation at least has some beneficial outcomes — which is more than what can be said for unemployment. When prices rise, the sellers of goods and services can make a greater profit. Wages will most likely increase and people can manage their debts more