In the Adirondacks there used to be a number of paper mills, every one of them h
ID: 1201463 • Letter: I
Question
In the Adirondacks there used to be a number of paper mills, every one of them has closed down. However, a group of entrepreneurs is going to refit one of the old paper mills and reopen it. They are planning on employing 5,000 workers in a town of 10,000 people. Why would you expect to observe low unemployment, rising wage rates, and rising prices for locally produced goods such as housing and services. What is the causal connection in this case between the town’s unemployment rate and changes in prices? does this involve inflation, economic efficiency?
Explanation / Answer
With half of the population (5000 out of 10000) getting employed by the entrepreneurs in the old paper mills, employment would rise by about 50%. This would lead to a fall in unemployment in the economy.
Recalling the Philips curve, it states that there exists an inverse relation between unemployment and inflation. Similarly, in the economy of Adirondacks with a fall in unemployment or increase in employment, the population would get more income in the form of wages. This would increase their spending capacity and thus expenditure, leading to increased demand for goods and services, and thus inflation.
The causal connection in this case between the town’s unemployment rate and changes in prices is that of Philips curve and involves inflation.