Economic Commentary

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Name: Nicole Paulet Piedra

Commentary number: #3

Due Date: 03/02/2009

Source: Emma Ross-Thomas, (30/01/2009), European Inflation Rate Falls, Unemployment Increases, Bloomberg.com: News, http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aiRziT71Pbu4

Section: 3, Macroeconomics

Word count:  746 words

This article talks about a recent increase in the rate of unemployment in the Euro-zone countries due to the fall of the rate of inflation, which was caused by a decrease in the oil and commodity prices. In this commentary, I will analyze the relationship between these two economic problems, discuss their effects and evaluate the possible solutions.

Europe’s inflation dropped from 1.6% to 1.1% in the last two months. According to economic theory, such a fall in the general price level (PL) is not ideal because it limits economic growth. In this case, the decrease of inflation rate is caused by a raise in the short run aggregate supply (SRAS) due to the fall of the oil and commodity prices. This also reduces the consumer’s price expectations, therefore decreasing aggregate demand (AD). [See graphs]

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The effects of this situation are double-sided. The fall in the European inflation rate will hurt people with variable incomes, and benefit people with fixed incomes. Due to the increase in the purchasing power of money, it will hurt borrowers and benefit lenders. As the value of money rises, savings will become more productive; however, it will cause a fall in expectations that reduces investment in the stock market. Finally, it will discourage the creation of new ventures; although, it will prevent future capital flight.

In addition to these effects, inflation provokes unemployment. The European Central Bank (ECB) ...

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