Sample Assignment on Economics

Running Head: ECONOMIC ASSIGNMENT
Economic Assignment
Name of the Student
Name of the University
Course ID

ECONOMIC ASSIGNMENT1
Table of Contents
Answer 1..........................................................................................................................................2
Answer 2..........................................................................................................................................4
Answer a......................................................................................................................................4
Answer c......................................................................................................................................5
Answer d......................................................................................................................................6
Answer e......................................................................................................................................9
References list................................................................................................................................10

ECONOMIC ASSIGNMENT2
Answer 1
Inflation and unemployment are the two major macroeconomic variables in an economy.
The former is related to the price level while later is related to labor market. The phenomenon of
gradual increase in the price level is known as inflation. Unemployment is the condition of labor
market where members in the labor market though willing to get a job but fail to find jobs. An
interrelation often observed between different macroeconomic indicators (Goodwin et al., 2015).
Inflation and unemployment might be influenced by a number of different factors but a common
linkage between the two variables. The figure below empirically tested the relation between
inflation and unemployment using data for Australian economy from 2001 to 2016.
4 4.5 5 5.5 6 6.5 7
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1.5
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f(x) = − 0.15 x + 3.52
R² = 0.01
Inflation and Unemployment
Unemployment
Inflation
Figure 1: Relation between Inflation and Unemployment
(Source: abs.gov.au, 2018)
The scatter plot above explains the relationship between inflation and unemployment.
The fitted trend line shows a moderate downward trend. This implies as unemployment increases
inflation goes down and vice versa. The co-efficient on unemployment in the fitted trend

ECONOMIC ASSIGNMENT3
equation is -0.154. This indicates with 1 percent increase in unemployment inflation goes down
by 0.15 percent. The economic rationale behind the inverse relationship between inflation and
unemployment is simple. As unemployment increases, the purchasing power of people reduces.
This causes a decline in aggregate demand creating a downward pressure on price (Bernanke,
Antonovics & Frank, 2015).
There is a theoretical background behind the relationship between inflation and
unemployment as explained by famous economist A.W.Phillips. Followed by his name the
relationship is popularly known as Phillips relation. The trade-off between price level and
inflation is explained by Phillips curve. Phillips studied the movement of inflation and
unemployment in United Kingdom over the period 1861-1957 (Heijdra, 2017). After the study it
was found that inflation is likely to be influenced by the unemployment level and change in the
rate of unemployment. From the findings, Phillips proposed the hypothesis that during high labor
demand, there remain few unemployed people in the economy. The employers then expect
wages to bid up rapidly and hence a higher price level. Opposite is the case in times of low labor
demand. The low labor demand is associated with a high rate of inflation. The low wage growth
then results in a slow increase in the price level. The second factor influencing the inverse
relation between inflation and unemployment is the rate of change in the unemployment (Uribe
& Schmitt-Grohé, 2017). During economic expansion, businesses expand rapidly resulting in a
high growth of labor demand. The fast growth in labor demand implies a decreasing trend in
unemployment rate. As cost of wage is one of the major component of production the wage
growth directly influences price level in the same direction.