EXAMINE the proposition that there exists a correlation btween the Essay

EXAMINE the proposition that there exists a correlation btween the rate of inflation and the level of unemployment. explain the significance of your result - Essay Example For instance, an unemployment rate of 5% is considered as acceptable in the United States. Almost all economic variables are related to each other. A rise in one consequently causes either a fall or an increase in another. Two variables display this relationship. These are unemployment and inflation. This essay will examine the proposition that there exists this correlation between the rate of inflation and the level of unemployment. Firstly, it will briefly explore the concepts of inflation and unemployment. Secondly, it will examine the relationship between these two variables. Thirdly, it will explain the significance of this correlation and finally give a conclusion. Inflation is, by simple definition, an increase in prices. However, in a more detailed definition, it is the consistent and sustained increase in the general price level of commodities and services. Inflation has an immediate effect on the value of a currency of the country experiencing it. For instance, if the United Kingdom is experiencing inflation in its economy, then the value of a sterling pound reduces. Here the value of a currency denotes its purchasing power or the quantity of real goods that one unit of the currency can purchase. The value of a currency varies with the level of inflation, and is never constant (Mankiw, 2011:43). Where there is an increase in the rate of inflation, the purchasing power of people in an economy declines. The opposite is also true for a decrease in the rate of inflation. Inflation is measured as percentage. Specifically, it is measured as a percentage increase of goods and services in a given year. For instance, if the rate of inflation in a y ear is 3%, then a commodity that costs 1 sterling pound will cost 1.03 sterling pounds after inflation is factored in. Inflation has three major variations. These are deflation, hyperinflation, and stagflation (Vogt, 2008:37). Deflation refers to a situation in the economy when the general price level of