Economic Commentary Essay Example for Free

Economic Commentary EssayThis article talks about a recent profit in the rove of unemployment in the Euro-zone countries due to the fall of the rate of inflation, which was caused by a cliff in the oil and commodity prices. In this commentary, I will analyze the consanguinity between these two frugal problems, discuss their effects and evaluate the possible solutions.Europes inflation 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 ideal because it limits economic ingathering. In this case, the decrease of inflation rate is caused by a raise in the short widen aggregate supply (SRAS) due to the fall of the oil and commodity prices. This also reduces the consumers price expectations, thereof decreasing aggregate demand (AD). See graphsThe effects of this situation are double-sided. The fall in the European inflation rate will hurt people with inconsistent incomes, and benefit people with f ixed incomes. Due to the increase in the purchasing power of money, it will hurt borrowers and benefit lenders. As the value of money rises, nest egg will become more productive however, it will cause a fall in expectations that reduces investment in the stock market. Finally, it will discourage the globe of new ventures although, it will prevent future capital flight.In addition to these effects, inflation provokes unemployment. The European Central Bank (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 older who is not representing but available for work and actively looking 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 screening that there is a trade-off between them. As inflatio n increases, people have 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 social costAccording to Arthur Okun, for every 1% increase in unemployment, there is a 2.5% decrease in the real GDP which will increase government acceptation and budget deficit, leading to a raise in the indebtedness of the countries.More unemployment implies more people insured by the social security programs hence, the government well-being 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 road violence and crime. Similarly, it incites alcoholism and drug consumption, as well as immigration and suicides.From the PC, it can be concluded that a high er inflation will decrease the rate of unemployment in the EU. This, according to the article, will be attempted by the ECB through the implementation 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 weaknesses, identified by Neo-Keynesian fiscal activists, is the weak colligate between banks and borrowers. This means that, regardless the interest rate changes, expectations remain unchanged. Fiscal activists also believe that monetary policy works indirectly and, thus, more behind however, monetary activists claim tha t 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 quint cash. Moreover, Milton Freedman affirms that it may destabilize the economy 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.