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Costs of Unemployment and Inflation

Costs of Unemployment and Inflation
In an economy both Unemployment and Inflation adversely affects economy.
Unemployment occurs when there is eligible persons looking for a job but unable to find work and Inflation means when there is overall increases in price level of the economy.

Costs of Unemployment

1. Unemployment causes the loss of potential output.
2. It causes the loss of valuable resources like (Manpower).
3. At the household level it causes the loss of income and consequent deterioration in standard of living of the household.
effects of unemployment4. Unemployment opens the door for illegal activities in the economy that will lead to higher illegal activities,(drugs supply, contract killing, etc).

Costs of Inflation

1. Inflation decreases the purchasing power of currency due to the rise in prices across the economy.
2. Inflation reduces real income of fixed income groups ( salaried class) as their income does not change at the same pace as price rise.
3. When there is a price rise borrowers gain in fixed fixed interest rate environment as the value money they return is lower than anticipated at the time of borrowing, on the other hand lender stand to lose as the value of money they receive after a lapse of time gets eroded.
4. During periods of high inflation, there is a fair chance of govt expenditure exceeding govt revenue that will result in fiscal deficit.
iflation cost , main costs of inflation , 5 costs of inflation.
5. In order to finance fiscal deficit the govt has three options: a) borrow from public, b) run down on foreign exchange reserve, c) and print ,money. Usually a govt running huge deficit is already under heavy debt and paying a high amount of interest, hence further borrowing becomes difficult Moreover such govt also have low foreign exchange reserve and therefore printing money becomes an easy option which fuels the rate of INFLATION.
6. The poor is more sensitive to inflation than The rich. The poor society of the economy looses more in inflation compare to rich so Inflation raises the Income inequality .

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