Imagine that you are a policymaker trying to decide whether to reduce the rate of inflation.?

To make an intelligent decision, what would you need to know about inflation, unemployment, and the tradeoff between them

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Imagine that you are a policymaker trying to decide whether to reduce the rate of inflation.?credit cards

Inflation and unemployment are GENERALLY negatively correlated.

In other words, reducing unemployment tends to increase inflation.

Keep in mind, however, that when looking at the modern Phillips curve, that inflation is defined by current inflation + expected inflation.

If you can reduce %26quot;expected%26quot; inflation, you can drop inflation and not horribly screw up employment in the long-run.

See Volcker in the early 1980s for a textbook example of how to destroy inflation without subsequently destroying the job market.

Imagine that you are a policymaker trying to decide whether to reduce the rate of inflation.?

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They should start by raising the minimum wage! My God it hasn%26#039;t been raised in what 12 years? Perhaps people would buy more goods if they could actually afford it. Every year cost goes up but the wage stays the same. It%26#039;s causing the gap in the US, the rich and the poor. Bush gave all these huge tax breaks to the rich and kicked the poor folks in the teeth! RAISE MINIMUM WAGE!|||something along the lines of when more people are working, more people are spending money in the economy. Which gives people more jobs because of the demand for products...etc.. But then everything goes to **** when there is a war.|||As a policy-maker I would want to first know what I should be maximizing. The consensus view held among economists is that policy-makers should maximize GDP, so I%26#039;ll assume that I want to maximize GDP (however, given a different assumption -- that I wanted for example to minimize unemployment even at the expense of GDP the answer could be different).

Second, if I%26#039;m trying to decide whether to reduce the rate of inflation I would want to know the current inflation rate, the current rate of unemployment, the current rate of GDP growth, and very importantly Iwould want to know the variance in those terms over the past ten year period.

Generally, economists don%26#039;t think inflation itself is harmful -- it is very harmful when it is erratic (meaning that inflation rate is hard for investors to predict), but its mere existence imposes harm in three ways: (1) Shoe-leather costs -- that is with highr inflation people keep less money in their wallet and more money in the bank -- thus they need to make more trips to the bank, (2) Menu costs, prices tend to be %26quot;sticky%26quot; that is they will stay at a certain level for a certain time period and then change suddenly. There is a cost both imposed by the stickiness since a firm is charging either above or below their profit-maximizing level at the given rate of inflation and a cost to them in having to relabel their goods.

So, I would also want to know the best measures of the current drain on GDP from shoeleather costs, and from menu costs, and from price-stickiness dead-weight-losses exacerabted by inflation. And, just to sum up, the only other thing about inflation itself that I%26#039;d be concerned about was the degree of variance in inflation rates over the past 10 years (or periods), and some regression expaining the relationship between GDP growth and variance in inflation.

On the Unemplyment side of the equation:

I would want to know the current level and then a relationship between unemployment and GDP (see Okun%26#039;s law).

As for the relationship: I%26#039;m not quite sure what to say other than I would want to know what the relationship was. Theory suggests that greater inflation could lead to a short term decline in the unemployment rate (although in the long term inflation rate, according to Milton Friedman has no effect on any real measure), the reason is %26quot;wage-stickiness%26quot; that is, employment contracts stay at a fixed level while inflation occurs so if inflation increases the laborer might be cheaper to the employer who can then go out and hire more laborers.

Having related both unemployment to GDP and inflation to GDP I would find the GDP maximizing levels of inflation and unemployment.