Why do most economists believe that a low unemployment rate will lead to higher inflation?

it is because when there is no umemployment, everyone has a job, everyone is happy, everyone has money. one way to inflation is when the firms can%26#039;t find new employees and have to take and %26#039;Steal%26#039; other employees from other firms; which is done by offering a higher salary. as this happens many times, people will make more money. so the cost of production can rise for each firm, so they have to increase revenue, and other firms see this increase in salary and revenue, and raise ther own prices. this chain of events can keep happening for a long time. which will lead to massive inflation.

other way of inflation in case of total employment, is when firms see that everyone is making enough money to live happy. and the products of firms can become inelastic as everyone can afford it. so they raise their prices to make more profit, which will cause another chain of events which will also result to a massive inflation.

so in conclusion, all the developed countries, are trying to keep the unemployment rate at between 2% and 3% in the economy. which is not too low but just perfect.

Why do most economists believe that a low unemployment rate will lead to higher inflation?

When the unemployment rate is very low the marginal propensity of consumers to consume is relatively high. Which means that the amount of money in circulation is relatively bigger compared with the amount being saved and thus being in the banks than when there is a higher unemployment rate.

I.e. means that everybody is taking out of his account more money at the same time, which means, that the banks are left with less cash. The same time people want to take on new credits in order to satisfy their wish for consumption.

The Fed tells the banks how much M1 or gold they need to have in reserve with them for every 1000$ they lend to someone, this is called the reserve rate. If the reserve rate were 10% the bank would need to have 100$ deposited with the fed for every 1000$ they lend, (less the money customers have deposited in their bank). So when the demand for credits goes up the commercial banks pressure the Fed to lower the reserve rate, which means they can give out more money in credits. The same time this means that the total amount of money in circulation goes up, while the amount of gold that is deposited as a reserve doesn%26#039;t grow. Basically a dollar note is a paper that declares that you have a single unit share in the countries gold reserves.

So if there was a small country that owned only on kilo of gold and there were 5000 1$note in circulation. Every 1$note would represent 0.2 mg of gold. If the country would now double the number of dollar notes issued each 1$note would be worth 50% less (by reducing the reserve rate) or represent only 0.1mg of gold.

So in order to provide the banks and the people with more money which they are willing to spend, as they feel save because they all have a job, and the economy is doing fine the Fed lowers the reserve rate which results in an inflation.

So inflation is actually not something that just happens but which is controled by the Fed.

Why do most economists believe that a low unemployment rate will lead to higher inflation?

Everything in economics comes down to supply and demand, and when demand is high and supply is tight, prices go up. A low unemployment rate suggests that the economy is running full-out trying to keep up with demand, and that labor and other resources are stretched to the limit.

When the unemployment rate is really low (say 4.5%), it is assumed that employers are having a hard time competing with each other to hire and retain the available labor, and that they%26#039;ll have to resort to raising wages to get and keep people.

That alone doesn%26#039;t equal inflation -- it may just mean businesses will suffer lower profits. But in such a scenario, it%26#039;s likely that most other goods and services are also in tight supply. There%26#039;s huge demand for raw materials, for electronic components, for consumer products, etc. People buying things are also competing with one another just as employers do for hiring. The result may be that everyone, seeing this supply-demand situation, finds they can raise prices on their own products a bit. And THAT equals general inflation.

The low unemployment rate may just be more of an indicator of this kind of tight supply...or it could in time be the cause, as full employment leads to more people spending more money for things.

Why do most economists believe that a low unemployment rate will lead to higher inflation?

In Keynesian economics, when there is an increase in aggregate demand, two things can happen: (1) either more resources are being utilized to produce more to meet the increase in aggregate demand - in other words, more labor is being employed, more raw materials are being used, and more of the economy%26#039;s productive capacity is being employed, or (2) when the economy can expand no further, prices begin to rise to meet the increase aggregate demand. When the unemployment rate is low, it is a sign that the country is operating at or near full-employment and most if not all the country%26#039;s productive resources and capacity are stretched to the limit. The only thing that can happen when this limit is reached is inflation.

Why do most economists believe that a low unemployment rate will lead to higher inflation?

Because historically, this is what tends to happen...

Why do most economists believe that a low unemployment rate will lead to higher inflation?

Low unemployment causes wages to rise and so increases demand and therefore prices if production does not keep pace. That the fed has suppressed wage growth for the last 30 years out of fear of inflation is partly responsible for the growing income inequality in the US. Economist assume that the rich will save extra income but working people will spend any increases so large wage increases to the super rich is not an inflation problem. Given that the savings rate has declined during this period their assumption appears incorrect. The US experience in the 50%26#039;s and 60%26#039;s which had low inflation, low unemployment, rapid wage growth, and high savings rates indicate that perhaps economist are wrong.