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?
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.
Between 2017 and 2018, Morocco's inflation rate rose from 0.75% to 1.85%. During that same period, the...