Introduction to Macro-Economics - Assignement

 

Assignment:                     i.        Using Phillip’s Curve, explain the relationship between   

                                    

          inflation and unemployment   

                                    

 ii.                   Briefly determine the role of money in an economy 

                                                   development

Solution to Assignment No.1

The relationship between inflation and unemployment using the Phillips’ Curve is explained thus:

The Phillips Curve examines the relationship between the rate of unemployment and the rate of money wage changes. 

Basing his analysis on data for the United Kingdom, Phillips derived the empirical relationship that when unemployment is high, the rate of increase in money wage rates is low.  This is because workers are reluctant to offer their services at less than the prevailing rates when the demand for labour is low and unemployment is high so that wage rates fall very slowly.

Professor Phillips, formerly of London School of Economics, urged that there was a close link between the level of unemployment and the rate of wage increase.  He studied the relationship between unemployment and the rate of changes in money wages in the U.K over the period 1862-1957.

It may also be considered a relationship between inflation and unemployment, because when there is inflation, money wages invariably go up under trade union pressure. 

Phillips Curve is shown in the diagram below:

In the figure above, rate of unemployment is shown along the x-axis and the rate of wage increase along the y-axis, both in percentages.

The curve also shows that when unemployment has reached a very high level, say 5%, wages do not rise at all, which means that, in the case of widespread unemployment, the workers are more keen to get employment than to fight for higher wages.

The Concept of the Phillips’ Curve has been widely accepted as a useful concept, though there are economists who question its realism i.e. they do not regard it as representing a realistic situation.

The Philips curve has important policy implications.  It suggests the extent to which monetary and fiscal policies can be used to control inflation without high levels of unemployment.  In other words, it provides a guideline to the authorities about the rate of inflation which can be tolerated with a given level of unemployment.

Solution to Assignment No.2

The Role of money in an economic development is determined below:

Introduction and definition of money

Money, a medium that can be exchanged for goods and services and is used as a measure of their values on the market.

The purpose of economy is to circulate the flow of funds between the economic agents i.e. Households, government and industries so that country can survive and boom.  Money is a standard medium of exchange which is circulated in an economy to benefit the society involved. 

The Gross Domestic Product or GDP is also judged as a country’s economic health and a good GDP can mean that a lot of countries will want to trade with them and go into business deals together.  However a low GDP can be an indicator of poor infrastructure, corruption and few business opportunities, which will put a lot of potential traders off.

Here are some few roles of money in an economy development:

1.           Production decisions:

Production has been greatly facilitated by the introduction of money.  Money makes possible the accumulation of wealth in those hands which are able to organize the production.  The captain of the industry hires the various factors of production in order to meet the future demand for goods and services and pays them in term of money.

2.           Accounting

Money helps determine the terms of a given transaction.  It sets a common bar of value, which every member of a society can agree upon.

3.           Ease of Transaction

Because money can be used in any transaction, it makes agreements easier to reach in the economic cycle.  Otherwise, a potential buyer must find a specific object which the seller wants in order to make a trade.

4.           Credit Creation

Money facilitates the creation of credit, which allows trade to flourish in an economic.

5.           Infrastructures

Building of roads, bridges and general infrastructures are done easily through money.

6.             

In conclusion:

Money is the most sophisticated social measurement system uses in our days.  It has played a major role in the industrialization of our society and in the development of our economy. 

REFERENCES:

Baron, John M., Mark A. Loewenstein and Gerald J. Kyunch (1988)  Macroeconomics London:  Addison-Wesley Publishing Company.

Edgemand, Michael A. (1983)  Macro-economics Theory and Policy 2^nd Ed., New Jersey; Prentice-Hall, Inc.