Unemployment vs. Inflation

Topics: Monetary policy, Unemployment, Inflation Pages: 3 (885 words) Published: March 16, 2013
Unemployment or Inflation
Wall Street Journal Assignment #1

Unemployment and inflation have an inverse relationship meaning that as one increases, the other decreases. According to the textbook, an ideal situation for the Federal Reserve would be to achieve both a low level of unemployment and a low level of inflation. After the 9/11 attacks in New York, the United States was put in a tragic financial crisis that led to the recession in 2008. While the debate for the causes of the 2008 recession continue to develop, most focus on the role that the public monetary policy and the practices of private financial institutions played on the financial crisis in the United States. Some economists claim that the origin of the crisis can be traced to the indebted US economy. The Fed’s misperception of costs and benefits of any further intervention is the main reason for its lack of attention to the unemployment problem according to economists and Wall Street Journal author Joellen Perry.

Currently in the United States, unemployment is the larger issue. Reasons for unemployment in the United States include demographics, education, comparative wage levels, advances in technology, and the fiscal and monetary policy. Unemployment is both the cause and effect to the economic growth rate, which ultimately is affected by both government fiscal policy and monetary policy. Since 2008, the United States has run large budget deficits accumulating to more than $1 trillion in debt and because the deficit was so large, it put upward pressure on interest rates, pressuring the Fed to use a stimulative monetary policy.

The Federal Reserve took drastic measures beginning in late 2007 with the establishment of new credit facilities to provide liquidity to financial institutions. During the recession, the Fed quickly lowered interest rates to stimulate the economy and increase the cash flow. I agree with the strategy used by the Fed regarding the monetary policy during the...

Cited: 1. Greider, William. "Can the Federal Reserve Help Prevent a Second
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2. Madura, Jeff. Financial Markets and Institutions. 10th ed. N.p.: Florida Atlantic
University, 2008. Print.
3. Murray, Sara. "Obstacle to Deficit Cutting: A Nation on Entitlements." Online.wsj.com.
Wall Street Journal, 14 Sept. 2010. Web. 8 Mar. 2013. <http://online.wsj.com/article/SB10001424052748703791804575439732358241708.html?KEYWORDS=recession+2008+united+states>.
4. Perry, Joellen, and Sudeep Reddy. "Inflation Is Stinging U.S. Workers Harder." Online.
Wsj.com. Wall Street Journal, 22 Aug. 2008. Web. 10 Mar. 2013. <http://online.wsj.com/article/SB121935236568761377.html>.
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