Both inflation rate and unemployment rate are closely watched aspects of macroeconomic performances of the economy, and they are also among the key variables guiding macroeconomic policy targets. Moreover, the sum of inflation rate and the unemployment rate is described as the misery index, which purports to measure the health of the economy and welfare.

The existence of high unemployment rate is a serious problem for households and for a nation at large. National outputs of goods and services decline during the recessionary gap of the business cycle and lead to high rate of unemployment. On the other hand, inflationary pressure leads to high inflation rate, which in turn leads to a decline in real income. Thus, high inflation rate has adverse effect on welfare of citizens, and the general economic well-being of a nation because it reduces effective demand and purchasing power of the people.

Studies indicate that there is a short-run trade off between inflation rate and unemployment rate. Thus, in the short-run, the trade off of between inflation rate and unemployment rate creates a challenge for macroeconomic policymakers.

1. If you were macroeconomic policymaker, how do you balance the short-run tradeoff between inflation rate and unemployment rate? Explain.

2. Official unemployment rate is an imperfect measure of joblessness. Give examples on how the definition of unemployment rate overstates or understates the number of jobless people in the economy.

3. Some policymakers and analysts argue that unemployment benefits create disincentives for job search and prolong the unemployment of workers. What’s your opinion on the relationship between unemployment benefits and labor market participation of the unemployed people?