Essay Outline the causes of both unemployment and inflation. Explain policies available to the government to combat these two economic issues. Unemployment and inflation have many different causes and the levels of have had severe fluctuations over time. Unemployment and Inflation can be caused by many different things but normally they follow the business cycle with high inflation in times of boom and high unemployment in times of recession.

The government can use two different policies to either expand or contract economic activity resulting in low or higher inflation or unemployment. Inflation is caused by many different things, all resulting back to an upswing of the economy so most of the time inflation in high in recessions and low in booms. Inflation is measured by the CPI which measures the changes in the price of a fixed basket of goods and services acquired by household consumers, so you can see how much you can get for your money and measure inflation.

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There are three main causes of inflation: Increase in consumer demand (demand-pull inflation) , increase in the cost of producing goods (cost-push inflation) and increase in the price of imports (imported inflation) One cause of inflation is demand-pull this happens when demand for a product becomes faster than business can increase there output this means that there will be shortages which will forces the price up and your purchasing power down. Demand pull inflation normally occurs when the economy is growing quickly

Another cause of inflation is cost-push inflation. This is when the increase of the price of something used to make the product increases meaning that the products price will be forced to increase. For example when oil rises all the products that are made with oil are forced to increase like petrol and plastic. Other inputs such as business cost and wage increases also affect to cost-push inflation. Imported inflation is when an increase in another country will mean the all goods produced by that country become more expensive to export to Australia.

Imported inflation is basically the increase in price of imports. Wages also contribute to inflation. An increase in wages is a cost to a business and means that the business will have to increase there prices or even reduce the ability to put on new workers (contributing to unemployment). But when employees see their standard of living fall (due to higher inflation) they demand for high wages this is the wage-price spiral Unemployment is basically people over the age of 15 who want to be and are trying involved in workforce but can’t find the opportunity.

There are many different causes of unemployment: cyclical unemployment, structural unemployment, seasonal unemployment, frictional unemployment and hardcore unemployment. One of the main two causes of unemployment is cyclical unemployment which is caused by a downswing in the economy which is a lack of aggregate demand. An example of cyclical unemployment is when an employee gets laid off because there is fewer customers. The other main cause of unemployment is structural unemployment. This can be from either changes in technology or changes in consumer taste.

For example a bank teller is laid off because they have built another ATM or if an employee in a car factory is laid off because people want cheaper imported cars. There are two main policies that the government uses to combat inflation and unemployment are the two countercyclical macroeconomic policies which are the fiscal policy and the monetary policy. fiscal policy is how the government controls the business cycle by either running a surplus budget which will contract the economy but let the government gain money (GT). When the economy expands inflation goes up and unemployment goes down and vice versa.

In 2009/10 the government ran a deficit budget that increased government spending by increasing pension by $32, $900 stimulus cash hand outs and increased spending on infrastructure. Monetary policy is used to expand or contract the economy through the fluctuation of interest rates normally controlled by the Reserve Bank of Australia (RBA). Present monetary policy 7. 25% down to 3% official cash rate. Which affects the aggregate demand by making it cheaper to borrow money so more people invest and spend will the official cash rate is lower so more money is circulated around the economy.