Question

Between 2017 and 2018, Morocco's inflation rate rose from 0.75% to 1.85%.  During that same period, the unemployment rate fell from 10.7% to 10.0%; however the labor force participation rate also fell from 47.5% to 47.1%. GDP per capita grew from $3,303 in 2017 to $3,357 in 2018.

a) Explain who is hurt by the rising inflation. In your answer, include an explanation of ONE of either menu costs or shoe-leather costs and ONE other cost of inflation.

b) Who in Morocco is benefiting? Your answer should address inflation, unemployment, and standard of living.

c) Given your answers to parts (a) and (b), is Morocco doing "better" or "worse" in 2018 than in 2017? Why?

d) Which do you believe is more dangerous for an economy - inflation or unemployment? Why?

Answer 1

a) The inflation means the rise in the price levels or erosion of the buying power of the money. In simple terms, if the inflation is 3% then the consumers are paying 3% more for the same basket of goods compared to the previous period.
A moderate level of inflation is acceptable in the economy but a persistent high level of inflation is a serious situation because it has a cost. A higher inflation affects everybody from the business to the employee.
The businesses have to incur the cost of changing prices because of rise in the input prices and this frequent changes does have a cost and also creates confusion.
If the inflation is high then currency looses its value and people avoid holding the cash. They prefer to deposit at the bank but frequent visits to the banks also has a cost and that is known as shoe leather cost.
Another issue is the fall in the real income. The inflation reduces the buying power of the currency and so it decreases the real income of the people.
Real Rate of Return = Nominal Rate - Inflation Rate

b) The inflation and the unemployment has the inverse relation with each other. The inflation is the result of higher money supply in the economy that means cheaper credit, higher consumption, higher output and lower unemployment. The fall in the real income because of the inflation lowers the standard of living of the people.
The inflation actually helps the borrowers whose repayment is lower in the real terms.

c) The information given is inadequate here. The inflation rate has risen in the country in the given period and it has more than doubled. The unemployment rate was 10.7% which was very high but it is lowered to only 10%.
It means there is no commensurate benefit of higher money supply or inflation in the employment for the country in that year. Morocco could be on the right track but in the year it has been worse with higher inflation and not much improvement on the employment front.

d) The case is not that which is worse because both inflation and unemployment have a tremendous cost and that disturbs the socioeconomic structure of the society. However, it depends on the situation that which moster should be allowed to enter in the economy.
the inflation affects the real income and that affects the marginal section of people. However, it is allowed if the unemployment level is also high as they have an inverse relationship with each other.
Unemployment, is far more serious and dangerous to the society. The job creation in the economy is necessary and lower real income is the acceptable situation than the no income at all. The 5% or close to that is considered as natural or normal. In this scenario, policy makers should target the inflation control.