Question

1. Background The relationship between unemployment and inflation has been at the centre of macroeconomics. However, no consensus has been reached on the theoretical and empirical bases (Amusa et al. 2013; Okafor et al. 2016; Phillips 1958; Roberts 1995; Vermeulen 2017). Theoretical Phillips (1958) advocated for a negative relationship between unemployment and inflation. On the other hand, Roberts (1995) argues that the Phillips Curve, which accounts for the sticky-inflation model, may be limited to account for rational expectations. This indicates that it exhibits less data adjustment due to the supposedly imperfect rationality of the agents as to their expectation formation change. Ball and Mankiw (1995) note that there is an erroneous interpretation that reflects the unproven link between inflation and unemployment as a causal relationship. McCallum (1997), on the other hand, Phillips (1958) influences policy, does not take into account other drivers of inflation and attributes the reason for inflation to growth. Empirically, there is no agreement on the relationship between unemployment and inflation. Scholars who have found a negative relationship between unemployment and inflation include Hodge (2002), Al-zeaud and Al-hosban (2015), Vermeulen (2015), and Okafor et al. (2016), among others. Scholars that have found a positive relationship between unemployment and inflation include Bhattarai (2016) and Vermeulen (2017), among others. Scholars that have found no clear relationship between unemployment and inflation include Rocheteau et al. (2007) and Asif (2013), among others. In the context of South Africa, fiscal authorities take unemployment very seriously, and it is included in the top 3 economic challenges, including poverty and inequality. South Africa has been characterized by unemployment rates of 26.53% as well as an inflation rate of 5.59%1 between 2008 quarter 1 and 2022 quarter 1 (SARB 2022a). There have been interventions by policymakers over the years to reduce the level of unemployment and inflation. provide this article selection of sample

Answer 1

The relationship between unemployment and inflation is a topic of discussion in macroeconomics. The Phillips Curve suggests a negative relationship between the two variables, but there is no consensus on this relationship. Empirical studies have produced mixed results, and in the context of South Africa, policymakers have implemented interventions to address high unemployment and inflation rates.

Step-by-step explanation:

In the field of macroeconomics, there has been a discussion about the relationship between unemployment and inflation. The Phillips Curve, introduced by Phillips in 1958, suggests a negative relationship between unemployment and inflation. This means that when unemployment decreases, inflation tends to increase, and vice versa. However, there is no consensus among economists regarding the theoretical and empirical basis of this relationship.

Some scholars, like Roberts (1995), argue that the Phillips Curve may be limited in explaining the relationship due to factors like rational expectations. Others, such as Ball and Mankiw (1995), emphasize that the link between inflation and unemployment should not be considered as a causal relationship. Empirical studies have also produced mixed results, with some finding a negative relationship, some finding a positive relationship, and others finding no clear relationship between unemployment and inflation.

In the context of South Africa, where unemployment and inflation are significant economic challenges, policymakers have made interventions to address these issues. However, the specific relationship between unemployment and inflation in South Africa may vary from the general findings, as the country's unique economic circumstances and drivers need to be taken into account.