Inflation and unemployment are two key macroeconomic problems. Inflation reduces the purchasing power of money and creates uncertainty in costs and prices. Unemployment reduces income, demand and social welfare. Governments try to stabilize the economy using monetary policy, fiscal policy, and structural reforms—this is called stabilization policy.
For business managers, these concepts are practical:
Inflation is a sustained increase in the general price level of goods and services over time, resulting in a fall in purchasing power of money.
Common types (by speed/intensity):
Other classifications:
Occurs when aggregate demand rises faster than aggregate supply.
Reasons:
Occurs when costs rise and firms raise prices.
Reasons:
Occurs due to structural bottlenecks and supply constraints.
Examples:
Effects on consumers:
Effects on firms/business:
Effects on economy:
Main policy measures:
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Causes of inflation (any three):
Thus, inflation can originate from excess demand, rising costs, or supply bottlenecks.
Effects of inflation on business (any three):
Hence, inflation increases costs and uncertainty for firms and can affect profitability and investment decisions.
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Inflation and unemployment are two key macroeconomic problems. Inflation reduces the purchasing power of money and creates uncertainty in costs and prices. Unemployment reduces income, demand and social welfare. Governments try to stabilize the economy using monetary policy, fiscal policy, and structural reforms—this is called stabilization policy.
For business managers, these concepts are practical:
Inflation is a sustained increase in the general price level of goods and services over time, resulting in a fall in purchasing power of money.
Common types (by speed/intensity):
Other classifications:
Occurs when aggregate demand rises faster than aggregate supply.
Reasons:
Occurs when costs rise and firms raise prices.
Reasons:
Occurs due to structural bottlenecks and supply constraints.
Examples:
Effects on consumers:
Effects on firms/business:
Effects on economy:
Main policy measures:
Unemployment means people who are willing and able to work at prevailing wage rates but cannot find jobs.
Types:
Main causes:
Stabilization policy refers to government actions to maintain stable growth with low inflation and low unemployment.
Objectives:
The basic Phillips curve suggests a short-run trade-off:
But in the long run, this trade-off may not hold strongly due to expectations and supply shocks.
Stagflation is a situation where:
It often occurs due to supply shocks (e.g., oil price shock) and is hard to manage because policies that reduce inflation can increase unemployment, and policies that reduce unemployment can increase inflation.
Inflation detected → Identify cause (demand / cost / structural) → Use policies:
Demand: tighten money + reduce deficit
Cost: improve supply + productivity + reduce input bottlenecks
Structural: remove bottlenecks + better distribution
→ Monitor prices → revise measures
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Stabilization policy refers to government and central bank actions aimed at maintaining a stable economy with steady growth, low inflation, and low unemployment. It mainly uses monetary policy and fiscal policy, supported by structural reforms.
Conclusion: Stabilization policy tries to smooth business cycles and create a predictable environment for households and firms.