Example Of Macr0economics Essay

The implementation of macroeconomic policies is done to achieve the government’s main aim of full employment and a stable economy through low inflation. The Phillips curve is an important tool in studying the relationship between these two parameters in an economy
Inflation is occasioned by an increase in the average price of goods and services over time, while unemployment is the condition where someone actively seeks a job but gets none despite their willingness to accept the market wage rates on offer at the time.
Philips, by analyzing unemployment data changes in the UK, observed that a stable curve represented the tradeoff between unemployment and inflation. Inflation and unemployment are related in an inverse manner with a decrease in one corresponding with an increase in the other. An illustration of this point would be a recovery from recession where the unemployment levels are high. With an improved economy, aggregate demand rise leads to an increase in employment with little demand for wage rise in the short term. As employment rates improve however, wages start rising slowly the cost of which is passed on to the consumer leading to increased aggregate prices and hence, inflation!
Owing to the current economic recession, the fed has several instruments at its disposal to influence economic activity. The main among these tools is its ability to influence monetary policy and specifically adjusting of the federal funds rate. This is the rate of interest banks charge amongst themselves for short-term loans. Why the federal funds rate has an impact on the economy is due to the fact that, these changes are passed on to other interests such that if the rate goes down, the borrowing costs for firms goes down and vice versa. The fed should in these times of high unemployment rate, reduce the federal funds rate. This will have the impact of reducing the borrowing costs of firms. The reduced borrowing costs stimulates borrowing for infrastructure development and capacity building within firms a\to boost production and thus increases the employment rate.
The long term effect will be an increase in inflation caused by increased earnings by the households raising the aggregate demand for goods and services and thus their prices shoot. The fed in this occasion reduce the rate appropriate to make it harder for households to borrow, thus reducing the money available to households and effectively capping inflation