Saturday, 8 August 2015

Relationship between inflation, unemployment, and monetary policy?

Rising inflation, leads to increase in expenses, which could lead employers to cut costs and subsequently layoff people or not hire more.
A central bank uses monetary policy as a tool to rein in inflation. Such tools could be raising interest rates.
High unemployment could also indicate a slowdown in economy, and the monetary policy may loosen I.E. Cut interest rates to boost the economy.

If there is greater inflation,there will be rise in market prices and if there is  no subsequent rise in wages it will be difficult for employees to sustain thier livelihood. 
Also the industries may downsize thier employee strength to overcome the stress on rise in wages.This leads to rise in unemployment. 
To control the inflation, the central bank uses monetary policy as an instrument to control the interest rates.

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