Economic Commentary Essay

This article talks about a young plus in the reckon of unemployment in the Euro-zone countries overdue to the drop cloth of the rate of pretentiousness, which was caused by a decrease in the oil and commodity prices. In this commentary, I ordain analyze the kin between these two sparing problems, discuss their effects and evaluate the possible solutions.Europes fanfare dropped from 1.6% to 1.1% in the last two months. According to economic theory, such a fall in the general price level (PL) is not precedent because it limits economic growth. In this case, the decrease of inflation rate is caused by a raise in the short outpouring aggregate supply (SRAS) due to the fall of the oil and commodity prices. This also reduces the consumers price expectations, hence decreasing aggregate demand (AD). See graphsThe effects of this situation are double-sided. The fall in the European inflation rate will hurt sight with variable incomes, and benefit people with fixed incomes. Due t o the annex in the purchasing power of bullion, it will hurt borrowers and benefit lenders. As the quantify of money rises, savings will become more productive however, it will cause a fall in expectations that reduces investment in the store market. Finally, it will discourage the creation of new ventures although, it will prevent future day capital flight.In addition to these effects, inflation provokes unemployment. The European Central camber (ECB) has reported that its unemployment rate rose from 7.9% to 8% in December, as inflation decreased. In the European Union, anyone 15 years of age or former(a) who is not working but available for work and actively expression for one is considered unemployed. This type of unemployment is classified as cyclical because it varies with the business cycle.In order to understand better how unemployment relates to inflation, the economist A.W. Phillips did several studies showing that thither is a trade-off between them. As inflation i ncreases, people hit more money in their hands. This will encourage the government to increase its spending, hence creating new jobs. Phillips designed a curve (PC) that portrayed the relationship between these contradictory macroeconomic goals.Increasing unemployment has the following economic and amicable costsAccording to Arthur Okun, for every 1% increase in unemployment, in that respect is a 2.5% decrease in the real GDP which will increase government borrowing and budget deficit, leading to a raise in the indebtedness of the countries.More unemployment implies more people insured by the affectionate security programs hence, the government welfare costs will increase. In addition, little people in conditions to pay income taxes will reduce government tax revenues.Unemployment causes an increase in homelessness and, therefore, in street violence and crime. Similarly, it incites alcoholism and medicate consumption, as well as immigration and suicides.From the PC, it can be think that a higher inflation will decrease the rate of unemployment in the EU. This, according to the article, will be attempted by the ECB through the writ of proceeding of discretionary expansionary monetary policy, which consists in a raise in money supply and a decrease in interest rate, to increase AD and lower SRAS. This is a policy taken from the Neo-Keynesian macro-model that believes in interventionism and short run measures to prevent deflation. See graphOne of the strengths of monetary policy is the short recognition, decision and execution lags. According to economists Mendel Gordon and Milton Freedman, they vary from 5-10 months and 6-24 months, respectively. One of its irresolutenesses, identified by Neo-Keynesian pecuniary activists, is the weak links between banks and borrowers. This means that, regardless the interest rate changes, expectations last out unchanged. Fiscal activists also believe that monetary policy works indirectly and, thus, more slowly howe ver, monetary activists claim that it is not slower than fiscal policy.Finally, monetary policy would succeed in increasing the rate of inflation, although it is moderate by cash leakages and volt cash. Moreover, Milton Freedman affirms that it may destabilize the saving because of insufficient information. Consequently, it is better to follow the K% rule which consists in the ecesis of a constant money growth rate determined by the Central Bank.