1.Economic data has shown a relationship between Inflation and Unemployment rates. What is this relationship called? What are some determining factors of the relationship? How has government...

1.Economic data has shown a relationship between Inflation and Unemployment rates.
What is this relationship called? What are some determining factors of the relationship?
How has government fiscal/monetary policy been utilized to attempt to manage this
relationship?
Answer:
The relationship between inflation and unemployment rates is called ‘Phillips curve’. The Phillips curve in the
short run implies an inverse relationship between inflation and unemployment rate. Some determining factors of
the relationship; a) the deviation of current level of output from its potential level, b) the deviation of current
unemployment rate from its natural rate and c) expected inflation rate.

Suppose the economy is suffering from a very high unemployment rate. In such a case, the government would
follow expansionary fiscal policy. Under this policy, government would increase its expenditure and reduce
taxes. As a result, disposable income would increase, causing consumption expenditure and hence aggregate
demand to rise. The rise in aggregate demand would lead to increase in labor demand in the economy and
hence unemployment will fall. Further, it would result in increase in the price level because aggregate demand
has increased relative to aggregate supply. Thus we find an inverse relationship between unemployment rate
and inflation rate.

On the other hand, suppose economy is suffering a very high inflation rate, in such a case, the government
would follow contractionary fiscal policy. Under such policy, government would reduce its expenditure and
increase taxes. As a result, disposable income would fall, causing consumption expenditure and hence
aggregate demand to fall. The fall in aggregate demand would lead to decrease in economy’s output and price
level. Moreover, due to fall in economy’s output, unemployment would rise. Thus we again find an inverse
relationship between unemployment rate and inflation rate.



2. International trade issues continue to permeate the news media.
Why is International trade an important issue? What is the primary rationale behind trade
between parties? How does currency market management by governments (fixed
exchange rates versus floating exchange rates) affect trading between countries?

Answer:
International trade is defined as the exchange of services, goods and capital between different countries. It is
an important issue because of following reasons;
1. GDP of many countries are dependent on trade
2. International trade facilitate transfer of technology
3. It helps in providing economies of scale in the production
4. To consume goods which cannot be produced domestically
5. To attract foreign capital - required to increase economy growth of recipient country

The economic basis to trade is gains from trade. Two nations trade with each other when it is beneficial for both
of them to trade i.e. two nations would be participating in the...