Unemployment and Inflation - The Phillips Curve
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Costs to the economy as a whole should not be under estimated. Firstly, Taxpayers paying money to the unemployed is not a loss of the economy as a whole. It is a transfer payment which redistributes existing resources within the economy. The actual loss to the whole economy is two-fold. Firstly there is the loss of output which those workers now unemployed could have produced had they been in work. The economy could have produced more goods and services which would then have been available for consumption. Secondly there are the social costs such as increased violence and depression which are borne by the unemployed and the communities in which they live.
At times of higher inflation, it is common for interest rates to lag behind, making real interest rates negative. The rate of interest does not fully compensate for the increased price level of goods due to inflation. If real interests rates are negative, then people with money in savings accounts will actually be losing money with the real value o ...
