ECONOMICS
BALANCE OF PAYMENTS
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Higher inflation
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Higher deflation
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Higher employment
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An increase in spare capacity
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Detailed explanation-1: -At full employment, unemployment will be at the nonaccelerating inflation rate of unemployment (NAIRU) and output will be at potential. In its projections, BLS assumes full employment in order to minimize any effect from cyclical fluctuations, focusing instead on structural changes to the economy.
Detailed explanation-2: -The conventional view is that full-employment can lead to inflationary pressures within an economy as high demand for goods and services leads to higher demand-pull inflation. And increasing demand for factor resources drives their prices up too-leading to cost-push inflation.
Detailed explanation-3: -If inflation is too high: Workers may then seek larger wage increases to compensate for the effects of higher inflation on their purchasing power. In turn, higher wage growth raises firms’ costs, which may lead firms to raise prices further and/or reduce the number of workers they employ.
Detailed explanation-4: -In layman’s words, increasing inflation leads to decreasing unemployment and vice versa. Following this theory in the 1960s, many governments adopted a ‘stop-go’ strategy.