Inflation Unemployment and the Fed

Document Type:Thesis

Subject Area:Engineering

Document 1

Real gross domestic production does not include the cost incurred during production for raw materials or productivity but it measures and accounts only for the value of finished goods and services. Real gross domestic production is the degree of the total productivity in a country without including the fluctuations of prices of finished goods and services. Real GDP is calculated for a period of a year and its value is compared with the value of the previous timeline in that case any occurrence of inflation during the period is omitted (Feenstra, 2012). Measuring real GDP of a country is important because it is a reflection of how the economy is performing. For instance, when the real GDP is high then it means that the economy of a country is performing well and the reverse is true. The concept of inflation is based on the value of a country’s currency during a certain period during its economic growth. Inflation is experienced when the value attached to a country’s currency is decreased due to increased circulation of money in the economy. When there is too much money in circulation, the demand for goods and services increases and in return increasing the prices of finished goods and services (Taylor and Solow, 2015). The increase in price for goods and services results to a decrease in the value of the currency of the country meaning that consumers can afford fewer products with equal sum of cash they held before inflation. Inflation can affect both the lender and the borrower this being determined by its cause.

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Unemployment can also be caused when employees tend to move from one employment to another thus known as frictional unemployment and finally the last type of unemployment is known as cyclical unemployment whereby workers are laid off during low economic growths and hired during peak seasons. Cyclical unemployment is most crucial in stabilizing the economy of a country therefore the Fed pays more attention to it. High rates of unemployment hurt the economy of the country while low rates of unemployment increases the GDP thus good for the economy growth of a country (Taylor and Solow, 2015). Aggregate supply accounts for the total quantity of goods and services a country produces on a yearly bases. The level of productivity in a country is determined by the man power provision in the process, the price and availability of raw materials, the technology and entrepreneurship.

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The main reason for its creation was to control the finances of the country by coming up with policies that would control the circulation of money in the economy, control activities of commercial banks and ensure that the economic system of the country is stable (Feldstein, 2010 p. The Federal Reserve has been mandated the responsibility of correcting the rates of inflation in the country and maintaining a low unemployment rate in the economy in bid to maintain a healthy performance for real GDP of the country. The discount rate is a tool used by the Fed to correct unemployment in the country. For instance, the Fed reduces the interest on banks thus encouraging them to lend more to businesses and consumers. Businesses expand their operations hence absorbing more people in their workforce thus decreasing unemployment.

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and 0. and promising a future rise. This increase sent a signal to some economic minds that the increase in rates would increase the level of unemployment thus a recession however the Fed stepped in to prove them wrong by not increasing the tariffs further after monitoring the world’s progress. In that case it was able to control the threat of inflation and also reduced unemployment cases as the article shows that “payrolls swelled by 215,000 in March…” (Finance and economics, 2016). In the second article, the Fed focuses on the growth of the country’s economy in comparison with the world. National Bureau of Economic Research. Feldstein, M. What Powers for the federal Reserve?. Journal of Economic literature, 48(1), 134-145. Michaillat, P, & Saez E. B, & Solow, R. M. Inflation, Unemployment and Monetary Policy.

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MIT P. Finance and economics.

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