Monetary Policy - Inflation - and Business Cycle

Question: Discuss about the Monetary Policy, Inflation, and Business Cycle. Answer: Introduction This study has highlighted the reason of why Spanish unemployment rate has been falling to the lowest level since 2011. In this purpose, this study has provided the impact of lower unemployment rate in the growth of the countrys economy. On the other hand, the impact of lower unemployment rate on the countrys government, industries have also described. In addition, this study is also helpful to identify the reason of lower unemployment rate of the country. As per the statement of Ball and Mazumder (2014), it can be mentioned that lower unemployment rate of a country is indirectly related with the countrys inflation rate. In this context, this study has aimed to discuss the effect of inflation rate on the countrys GDP growth rate. It is known that Spain is the fourteenth largest economy within the world in terms of nominal GDP. On the other hand, it can be added that the purchasing power parity of Spain is the largest in the world. Moreover, it can be mentioned that this study has pro vided the concepts of several types of unemployment of an economy. Analysis From the above figure, it can be observed that the rate of unemployment of Spain has been decreasing after 2011. In this connection, it can be stated that the Economic position of the country is at good position. In the words of Blanchflower et al. (2014), it can be mentioned that unemployment rate can be estimated by the division of total number of unemployed workers to the total number of employees. On the other hand, unemployment rate of an economy can be estimated by two methods such as claimant count and labour force survey. According to Clarke (2016), it can be mentioned that the Spanish economy has created 525000 jobs in the year of 2015. Therefore, it can be stated that the rate of unemployment of the country has reduced by 20.9 percent. On the contrary, Daly et al. (2016) argued that the degree of unemployment rate of Spain is higher compared to the other countries. During the period of global economic recession, the unemployment rate in Spain was highest and the rate was increased in the year of 2010 by 20 percent to 25 percent. In this connection, Desilver (2013) opined that Spanish economy was suffering from the structural unemployment from the year of 1980s. On the other hand, it can be stated that Spain was suffering from the poor structure of tourism and building sectors. Moreover, the performance of the industries within the country was also very poor. Draghi (2014) opined that Spains economic recovery is the reason of crisis hit of the labour market of the country. In this purpose, it can be added that the quarterly labour market survey identified that the number of employment has increased from 3 percent to 18.1 percent in an year at the end of the quarter of 2015. Furthermore, Gal (2015) mentioned that the total number of unemployment in Spain has decreased from 12.4 percent to 4.78 percent. In this purpose, it can be mentioned that Spanish workforce would constantly shrink due to the migration and also the long term unemployed workers would feel reluctant to search for work. Therefore, there are approximately 678000 unemployed Spaniards in the last year. Moreover, it can be noticed that there are only 1 percent employees, who are jobless for more than four years. On the other hand, only 6 percent employees are in the training session. Although, the rate of unemployment was higher during the time of global economic recession in Spain, after that, the rate of unemployment was decreased with the rise in time. According to Katz (2014), the employment reform of 2012, made increase the rate of employment of the economy. Types of unemployment There are five major types of unemployment including the demand deficit unemployment, structural unemployment, real wage unemployment, voluntary and the frictional unemployment. Demand deficient unemployment In the words of Kroft and Notowidigdo (2016), it can be mentioned that demand deficient unemployment occurs due to the situation of recession for very lower growth of the economy. In addition, due to the insufficient aggregate demand, the organisations would cut back the production. Therefore, it can be inferred that if the organisation cut back the output level, the employment rate would be reduced. With the rise in the level of recession, the demand deficient unemployment will be increased. Mamedov (2016) cited that due to the biggest cause of higher unemployment rate, the economy of a nation would start to fall. This situation can be described with the concept of cyclical unemployment, which arises due to the situation of economic downturn. The above figure highlighted that reduction in aggregate demand and lower output level increases the unemployment rate. On the other hand, it can be mentioned that when the labour is at the level of equilibrium, then there would occur the situation of natural unemployment within the economy. Structural unemployment According to Ormerod, Rosewell and Phelps (2013), it can be mentioned that unemployment rate of an economy increased due to the inefficiencies within the labour market. Due to the mismatch of skills or geographical location, structural unemployment would be increased. More precisely, structural unemployment arises when the labour market of an economy would not be able to provide jobs to the employees. Moreover, it can be stated that structural unemployment is the consequences of cyclical unemployment. In this situation, wages are usually kept higher than the level of equilibrium. Minimum wage rates would lead to the minimum wage rates and this would lead to the excess labour supply. This would in turn imply that the labour market of an economy is competitive. On the other hand, Owyang, Ramey and Zubairy (2013) added that Keynesian analysis highlights the decrease in aggregate demand can reflect the real wage unemployment rate. Frictional unemployment Frictional turnover arises due to the normal turnover within the labour market. Fractional unemployment is present to degree in a country. As a result, due to the mismatch among employees and the jobs, the situation of frictional unemployment occurs. On the other hand, frictional unemployment is connected with the skills, work time, location f the organisations. This type of unemployment is reflected by the voluntary decisions depending on the each of the employees valuation. Voluntary unemployment In the point of Phillips and Land (2012), it can be mentioned that voluntary unemployment arises when the employees would not select to take a job at the wage rate. The employees may feel that there is no increment to take a job. Impact of unemployment on the economy As per the opinion of Phillips and Land (2012), it can be mentioned that unemployment of a country arises when the people of the country are willing to work and capable to work or also do not have a job. However, it can be observed that the unemployment rate of Spain has decreased over time. Therefore, it can be stated that lower unemployment rate has a greater impact on the government, on the economy, on industries and also on the people. As the rate of employment has been increasing, therefore, more people will earn higher income and they will be able to pay the tax. This will in turn increase the government revenue. Therefore, Shimer (2012) opined that the governmental finances will be improved. In addition, higher employment rate will increase the purchasing power parity and the standard of living of the country. Hence, it can be mentioned that the GDP growth rate and the per capita income of the economy will be increased. In this connection, it can be mentioned that the there is a negative relationship between the unemployment rate and the countrys economic growth rate. This inverse relationship can be described with the help of the Okuns law. In this context, Svensson (2015) opined that with the 1% decrease in the unemployment rate, the GDP growth rate of the country will be increased by 2%. In this connection, it is necessary to remember that this relationship based upon the economic situation of the country and also on the time period. On the other hand, it can be observed that with the decrease in the unemployment rate of Spain, the labour force of the country has increased. The employees are also willing to increase the working hours. As a result, individual performance of the employees would be increased and the overall productivity would also increase. In the points of Tanveer Choudhry, Marelli and Signorelli (2012), it can be mentioned that lower rate of unemployment in a country would decrease the supply of labour. This would in turn create the upward pressure on the wage rate. Nevertheless, this has an adverse effect on the employees. The firms require to pay higher wages to recruit new employees. Lower unemployment rate implies that the disposable income of the employees has increased within the economy. As a result, it can be inferred that the overall spending on goods and services has increased. This would in turn imply that the organisations within the economy has experienced higher sales revenue and has also experienced higher profitability from the business. On the contrary, it can be mentioned that if the rate of unemployment of a country has increased, then the purchasing behaviour of the buyers would be changed. In this purpose, it can be added that the purchasing of inferior goods would be increased. As opined by Katz (2014), inferior goods are those, which are purchased when the income of the consumers are getting down. This would enhance the sales of the inferior goods and the sellers of the inferior goods would be highly profitable. Their earning revenue would be increased. On the contrary, it can be mentioned that if the unemployment rate of a country is lower, then the wage rate of the employees would be lower. However, the organisations require to spend more resources to train the new employees. As a result, it can be mentioned that the employment cost would be increased. In this connection, it can be stated that the as the unemployment cost is decreasing with the rise in time, therefore, the organisations of Spain do not require to spend higher employment cost. On the other hand, Gal (2015) opined that the employees of Spain has not been suffering from illness or depression due to the lower unemployment rate. In addition, it can be opined that lower unemployment rate of a country would be helpful to increase the overall productivity of the organisation. This would in turn increase the performance of the overall economy of the country. According to Draghi (2014), greater production effectiveness can significantly meet the consumers demand. As a result, it can be inferred that the relationship between the suppliers and the buyers would be improved. Relationship between unemployment and inflation rate The relationship between the rate of unemployment and inflation rate of a country can be described with the help of Phillips curve. According to Desilver (2013), it can be mentioned that there is a negative relationship between the rate of unemployment and the rate of inflation. Therefore, it can be mentioned that with the decrease in the unemployment rate of Spain, countrys inflation rate has increased. Nonetheless, the curve is not linear. In this connection, it can be noticed that the short run Phillips curve is looking like L shaped. From the above figure, it can be observed that Phillips curve shows the inverse trade off among the unemployment rate and inflation rate. For example, it can be stated that if an economy has experienced 3 percent unemployment rate in turn of the cost of 6 percent rate of inflation. On the other hand, the rise in the unemployment rate by 5 percent would lower down the rate of inflation by 2 percent. As predicted before, due to the lower unemployment rate of Spain, the inflation rate of the country has been increasing. In the words of Clarke (2016), it can be mentioned that the price level of the country has increased. Therefore, it can be inferred that the cost of holding money of the people of the country has increased. Purchasing power parity of the country has increased. In the points of Blanchflower et al. (2014), it can be observed that higher inflation rate is good for the boost of the country. The overall money supply of the country has increased. In addition, it can be stated that a moderate inflation rate has reduced the real value of debt. As a result, it can be inferred that the economic health of Spain has improved. On the contrary, Ball and Mazumder (2014) criticised that in case of rapid improvement in the price level of an economy, the situation of hyperinflation would be occurred. In this case, it can be mentioned that the cost of the products would be extremely higher. This situation is not feasible to the residents of the country. Conclusion This study has highlighted and reviewed the topic; Spanish unemployment has been falling from the year of 2011. This study has also highlighted an in depth analysis, how the country has reduced the unemployment rate of the economy. In addition, in this study the impact of lower unemployment rate has dscribed. On the other hand, this study has mentioned how lower unemployment rate has reflected the countrys GDP growth. After the analysis of the study, the relationship between the inflation rate and the unemployment rate has highlighted. References Ball, L. and Mazumder, S., 2014.A phillips curve with anchored expectations and short-term unemployment(No. w20715). National Bureau of Economic Research. Blanchflower, D.G., Bell, D.N., Montagnoli, A. and Moro, M., 2014. The Happiness Trade?Off between Unemployment and Inflation.Journal of Money, Credit and Banking,46(S2), pp.117-141. Clarke, M.A., 2016. How the unemployment rate in Spain affects university enrollment. 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