Short-Run Trade Off between Inflation and Unemployment

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Short-Run Trade Off between Inflation and Unemployment
Friedman and Phelps significantly contributed to the testing of the natural-rate hypothesis. The two made a prediction that came true between 1961 and 1968. Within a period of eight years, as inflation continued to rise, unemployment fell. Policymakers confirm that the United States of America’s (USA) economy encountered a trade-off between unemployment and inflation (Chapter 22 474). In particular, inflation occurs when a currency’s purchasing power decrease in a particular period such that a specific unit buys fewer items or products than it used to purchase before. Based on the Phillips Curve, inflation can influence unemployment. The central bank plays a significant role in regulating the money supply, meaning that it can control inflation. For instance, it can slow the money supply in the economy, reducing the quantity of products and services produced by companies. The decline in the aggregate demand causes a decrease in the quantity of products and services, lowering production and leading to an increase in unemployment.
In the scenario at hand, if a drought occurs in a country, crops will be damaged since many farmers cannot afford to irrigate their many hectares of land. These crops will die or wither due to the lack of water, which is an essential component for the growth and maturation of numerous plants. In that light, there will be extremely lower harvests, causing the price of food to increase. Meat products will also shoot up since animals would not have enough plants to ...