Question

Inflation vs. Unemployment

The European Central Bank (ECB) has been known for setting strict inflation targets (in other words, their monetary policy has been oriented towards maintaing price stability). Suppose they suddenly changed their minds and instead started focusing on low unemploymentas their main goal. Discuss and describe the possible impacts of this change! What would be the problems ECB will face in the context of this new approach?

Answer 1

Ans: As it is known that, decrease joblessness, in an market will correlate with higher rates of inflation. If the European Central Bank (ECB) wants to hub on low employement which is providing more opportunities for the employment, there is every leeway to rise in the rate of increase rate.

The effect of inflation on the verdict could be:

The real notice rate will increase.

Higher interest rates will reduce consumer spending and investment leading to lower combined demand.

This fall in aggregate demand will lead to lesser inflation.

If economic policy is done well, you can avoid some of the boom and bust economic cycle we experienced before, and enable sustainable low inflationary growth which helps reduce unemployment.

Higher real interest rates provide incentive for people to save more and to make use of less. Lower real interest rates provide incentives for people to save less and to borrow more.

Real interest rates usually are positive because people must be rewarded for defer the use of property from the present into the future.

Higher interest rates reduce trade investment expenses and consumer spending on lodging, cars, and other major purchases. policy that raise interest rates can be used to reduce these kind of spending, while policies that decrease interest rates can be used to increase these kinds of spending.

Real interest rates normally are optimistic because people must be remunerated for defer the use of resources from the present into the future.

Higher interest rates decrease business investment spending and customer spending on housing, cars, and other major purchases. Policies that raise notice rates can be used to lessen these kinds of spending, while policy that cut interest rates can be used to increase these kinds of expenditure