Introduction
Economics studies the allocation of scarce productive resources that includes workers, machines, and land to different productive activities particularly factories, offices, farms, labor, and machinery whose purpose is to generate commodities that will satisfy consumers’ needs. In the economists’ own language, economics examines how scarce, or limited, factors of production usually defined as land, labor and capital can be used wisely when there are many competing uses. In brief, economics is hailed as the science of rational choice under conditions of scarcity (Varoufakis 1998). Economics is the study of how people choose to allocate its scarce resources to meet unlimited wants in order to maximize benefits to the society and distribute benefits according to effort exerted. It is concerned with the production, distribution, exchange, and consumption of goods and services. Economists focus on the way in which individuals, groups, business enterprises, and governments seek to achieve efficiently any economic objective they select. Other fields of study also contribute to this knowledge: Psychology and ethics try to explain how objectives are formed; history records changes in human objectives; sociology interprets human behavior in social contexts (Fishman 1999).
It tries to explain the behavior of the economy by building hypotheses or theories. Specific versions of these theories are sometimes referred to as economic models. These models are simplifications of the real world that are potentially useful in illustrating some key feature of how the world works. Theories are tested by their internal consistency, by their conformity with established principles, and against available data. The latter is the ultimate test of how useful economics is to non-economists. It tries to give answers to questions like does it help explain or predict things that are going on in the real world (Chrsytal & Lipsey 1997). Economics as a subject can be divided broadly into two general topic areas particularly microeconomics and macroeconomics. Microeconomics focuses on explaining the behavior of individual firms, consumers, or product markets. It is concerned with looking at a small part of the economy (Chrsytal & Lipsey 1997). Microeconomics goes beyond the analysis of the behavior of individual agents in that it is also concerned with the way the decisions of economic agents interact in the determination of the allocation of resources between uses in an economy (Curven & Else 1990).
Macroeconomics, in contrast, looks at the output of the economy as a whole and is concerned with aggregate questions relating to inflation, unemployment, the balance of payments, and business cycles. In macroeconomics the value of cornflakes, beer, cars, strawberries, haircuts, and restaurant meals, along with the value of all other goods and services produced is averaged together. This results into studying the movement of aggregate national product. The prices of all goods and services consumed are also averaged together and discuss the general price level for the entire economy. It is usually just called the price level (Chrsytal & Lipsey 1997). The paper will discuss about inflation and the statement that the Phillips curve implies that when unemployment is high, inflation is low and vice versa. Therefore, we may experience either high inflation or high unemployment but not both. The paper will also discuss about the statement as long as we do not mind having high inflation, we can achieve as low a level of unemployment as we want. All we have to do is increase the demand for goods and services by using, for example, Expansionary Fiscal Policy.
A. The first statement
Inflation is the pervasive and sustained rise in the aggregate level of prices measured by an index of the cost of various goods and services. Repetitive price increases erode the purchasing power of money and other financial assets with fixed values, creating serious economic distortions and uncertainty. Inflation results when actual economic pressures and anticipation of future developments cause the demand for goods and services to exceed the supply available at existing prices or when available output is restricted by faltering productivity and marketplace constraints. Sustained price increases were historically directly linked to wars, poor harvests, political upheavals, or other unique events. When the upward trend of prices is gradual and irregular, averaging only a few percentage points each year, such creeping inflation is not considered a serious threat to economic and social progress. It may even stimulate economic activity: The illusion of personal income growth beyond actual productivity may encourage consumption; housing investment may increase in anticipation of future price appreciation; business investment in plants and equipment may accelerate as prices rise more rapidly than costs; and personal, business, and government borrowers realize that loans will be repaid with money that has potentially less purchasing power (Michie & Smith 1997).
A greater concern is the growing pattern of chronic inflation characterized by much higher price increases, at annual rates of 10 to 30 percent in some industrial nations and even 100 percent or more in a few developing countries. Chronic inflation tends to become permanent and ratchets upward to even higher levels as economic distortions and negative expectations accumulate. To accommodate chronic inflation, normal economic activities are disrupted. Consumers buy goods and services to avoid even higher prices; real estate speculation increases; businesses concentrate on short-term investments; incentives to acquire savings, insurance policies, pensions, and long-term bonds are reduced because inflation erodes their future purchasing power; governments rapidly expand spending in anticipation of inflated revenues; and exporting nations suffer competitive trade disadvantages forcing them to turn to protectionism and arbitrary currency controls (Michie & Smith 1997). The statement means that when there so many unemployed the inflation rate goes down. When more people are unemployed people can’t buy things they need. Sellers can’t rise their prices since no one is buying they are then pushed to lower or maintain their price. The rise in inflation rate and unemployment rate is related and coordinated with each other, when people experience a rise in unemployment they can experience a decrease on inflation but a rise in these two cannot be experienced. Both inflation and unemployment cannot experience increase or decrease at the same time economic stability may be ruined and it may create other problems for a country.
B. The second statement
Congress and the President use an expansionary fiscal policy to fight contractions, and a restrictive fiscal policy to fight inflation. An expansionary fiscal policy is designed to increase spending by individuals and firms and, thus, increase aggregate demand in the economy. Congress and the President use expansionary fiscal policy to combat recession. To pull a sluggish economy out of recession, the government decreases taxes, increases government spending, and increases the investment tax credit. By decreasing taxes, people are able to keep and to spend a larger portion of their disposable incomes. By increasing government spending more defense contracts, expanding the nation’s infrastructure, building schools, and so on. The government is pumping money directly into the economy. By increasing the investment tax credit, the government encourages firms to invest in new capital goods and hire additional workers (Faille & O’Connor 2000). The expansionary fiscal policy increases demand by increasing the expenditures of people and firms. If a country doesn’t mind having a high inflation it can achieve a low level of unemployment but it has to use expansionary fiscal policy to increase demand. A country has to make sure that there is a balance between the unemployment and inflation and in doing so it has to make sure that there is an increase in demand.
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