Economic Commentary Essay

This article talks active a recent increase in the vagabond of unemployment in the Euro-zone countries due to the giving up of the gait of ostentatiousness, which was caused by a ruinationing off in the petroleum and commodity be. In this commentary, I lead analyze the descent between these two economic problems, cover their effects and evaluate the possible solutions.atomic number 63s lump dropped from 1.6% to 1.1% in the function two months. According to economic theory, much(prenominal) a fall in the ordinary price level (PL) is not specimen because it limits economic growth. In this case, the reduction of inflation pose is caused by a set up in the minuscule run totality supply (SRAS) due to the fall of the oil and commodity prices. This also humiliates the consumers price expectations, at that placefore decreasing aggregate solicit (AD). See graphsThe effects of this situation are double-sided. The fall in the European inflation rate result hurt hatful with variable star incomes, and benefit people with fixed incomes. overdue to the increase in the purchasing occasion of money, it entrust hurt borrowers and benefit lenders. As the value of money rises, savings leave alone become to a greater extent productive however, it will cause a fall in expectations that reduces investment in the stock market. Finally, it will discourage the creation of refreshing ventures although, it will preclude future capital flight.In addition to these effects, inflation provokes unemployment. The European fundamental Bank (ECB) has reported that its unemployment rate travel from 7.9% to 8% in December, as inflation decreased. In the European Union, anyone 15 historic period of age or older who is not controling but available for work and actively looking for one is considered unemployed. This vitrine of unemployment is classified as cyclical because it varies with the avocation cycle.In order to understand amend how unemployment relates t o inflation, the economist A.W. Phillips did several studies showing that there is a trade-off between them. As inflation increases, people have to a greater extent money in their hands. This will win the government to increase its spending, hence creating new jobs. Phillips designed a curve (PC) that visualized the relationship between these contradictory macroeconomic goals.Increasing unemployment has the following economic and societal costsAccording to Arthur Okun, for every 1% increase in unemployment, there is a 2.5% decrease in the real gross domestic product which will increase government get and budget deficit, leading to a exalt in the indebtedness of the countries.More unemployment implies more people insured by the accessible security programs hence, the government welfare costs will increase. In addition, less people in conditions to pay income taxes will reduce government tax revenues.Unemployment causes an increase in homelessness and, therefore, in street viol ence and crime. Similarly, it incites intoxication and drug consumption, as well as immigration and suicides.From the PC, it can be reason out that a higher inflation will decrease the rate of unemployment in the EU. This, concord to the article, will be attempted by the ECB through the implementation of discretionary expansionary pecuniary 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 interpreted from the Neo-Keynesian macro-model that believes in interventionism and short run measures to prevent deflation. See graphOne of the strengths of pecuniary policy is the short recognition, decision and execution lags. According to economists Mendel Gordon and Milton Freedman, they deviate from 5-10 months and 6-24 months, respectively. One of its weaknesses, identified by Neo-Keynesian monetary activists, is the weak links between banks and borrowers. This delegacy that, regardless the interest rate changes, expectations go along unchanged. Fiscal activists also believe that monetary policy works indirectly and, thus, more slowly however, 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 limited by cash leakages and quintet cash. Moreover, Milton Freedman affirms that it may destabilize the thriftiness because of insufficient information. Consequently, it is better to follow the K% rule which consists in the establishment of a constant money growth rate determined by the Central Bank.