In fact, a certain amount of unemployment is factored into any attempt to control inflation. Although economists don’t agree on specifics, it is widely accepted that a certain number of jobs must be lost to control each 10th of a percentage point of inflation.
However, if inflation is below 2-3%, and unemployment is above 4%, then ways to stimulate the economy are considered. The primary method for the Federal Reserve to change monetary policy by reducing the Fed Funds Rate. This lowers overall interest rates and spurs businesses to borrow money to invest in their businesses and eventually hire more workers. Low interest rates also boosts the housing market, creating wealth and increasing personal consumption spending.
The second method is through fiscal policy. The Government can directly create jobs through increased spending on government projects, as happened in the New Deal, or through tax cuts, which stimulates spending just like an interest rate decrease.
- How Is Employment Defined?
- How Is Unemployment Defined?
- ]What Is Being Done to Control Unemployment?
- What Can I Do to Protect Myself From Unemployment?