Macroeconomics. Price level Essay Example | Topics and Well Written Essays - 1500 words

Macroeconomics. Price level - study ExampleEconomists have noted that in long run, fanf be and unemployment becomes increasingly unrelated to each(prenominal) other. That direction a change in the unemployment seems to have little or no solvent on the ostentatiousness and vice versa.Inflation is also inversely proportional to the total consumer expending. As inflation goes up consumers atomic number 18 wary of spending and hold their purchases as dearly as possible. This is due to the fact that when prices arising in that respect is also a hike in the expected price levels in the future that has an adverse issuing on the consumer spending. When prices increase the consumer spending power comes down and disposable incomes are significantly menialer.When unemployment is low and there is an increase in price level, enlists volition burn down in response to higher prices. This is because in low unemployment situation, employees can successfully demand full compensation for the higher prices. This has spiralling effect on some(prenominal) the wages and general input costs along with the consider of inflation. All these factors tend to leapfrog each other under low unemployment.When unemployment is moderate, however, the employees will not be compensated in full and will have to settle for little, and so the wage costs do not rise as dissipated as prices when unemployment is high. ... This will stop the rise of the prices and rate of increase in inflation. Under full unemployment, the wage costs will be sufficiently low to hold the prices down and unless the regulatory authorities feel in the market will go into a deflationary mode. In between the full and low rate of unemployment there is a certain level thats just high enough that costs and prices rise at the same level, so that inflation remains a stable level. (Pettinger). This unique rate of unemployment is called the non-accelerating-inflation rate of unemployment or NAIRU in short. Economis ts note that in developed economies such as Australia, the tendency of the rate of unemployment automatically has a tendency to reach the NAIRU rate of employment. Whenever there is inflationary pressure, the unemployment in the long term adjusts itself towards NAIRU rendering the short term Phillips curve invalid. The below figure shows that an extra one percentage point of unemployment pushes the inflation rate down by about 0.4 percentage points in the following year--more in some years, less than others.(DeLong, 2002).Expectation of a price rise & its impact on consumption spendingWhen inflation is on the rise and prices of commodities increases, it raises the expectation of the price level also. Initially higher inflation expectations can have an emotional effect because when consumers expect a generalized rise in prices across essential goods and services, then it makes them accelerate their spending to prevent paying higher prices later, providing a near-term increase in co nsumption. However provided the interest rates are not changed, the consumptions comes down as people adjust their spending to match their dispensable income until they