The Effects Of Inflation On The Economy - 1129 Words

Decades ago, many economists did not believe that inflation –the escalation of prices that makes the money to be less valuable in the market- (Newnan, Eschenbach, Lavelle, 2014) could rise together with unemployment because they stood in the wide belief of a direct relation between economic growth and employment. That is to say that when the nation’s economy is in its healthy moments, the rate of unemployment will decrease, and in the other part the inflation will increase because people have more income, so, they will be willing to spend more. Moreover, people thought that increasing of inflation allowed the economy to grow. Therefore, if inflation reduced, the unemployment would be raised, and consequently, the economy of the country†¦show more content†¦In that way, not only the need of goods will drive the labor force to its pleasant stage, but it will also force prices to escalate simultaneously (Aspromourgos, 2012). Although the Keynesian-economic policy is wrong in the present view, it was not until the 1970s when an unknown phenomenon emerged in the United States that its ineffectiveness was proven; for the surprise of many economists. The phenomenon was defined as â€Å"stagflation,† and it consists of a â€Å"period [in which both] unemployment and inflation rise at the same time† (Barsky and Kilian, 2004, p.131), and it was caused by primary the combination of shock in oil prices and unsuccessful monetary policies. Actually, there are two theories that try to explain the possible causes of the 1970s stagflation. On one hand, experts believe that the attempt of policy makers to control the fluctuation of inflation that the nation faced in the previous years to the stagflation might have led to the unintended consequences. For example, when the federal government put in place restriction monetary policy to avoid a rapid growth of the nation’s economy that would turn the inflation down; the inflation was up as a result of the over money supply that the central bank applied during the 60s following the Phillips curve. Thus, the excess stimulation or liquidity caused the high inflation rate that the restriction was intended to bring down. Unfortunately, this restricting actions did not shift the inflation