Economic and Budgetering Policy: The Relationship Between Inflation, Unemployment, and Government Measures in Stable Economic Growth

Abstract

The relationship between inflation and unemployment is of significant economic importance, as illustrated by Indonesia's experience from 1984 to 2017. Indonesia's unique position shows that unemployment causes inflation, while inflation does not cause unemployment, and the effectiveness of inflation policy in reducing unemployment is limited due to implementation difficulties resulting from regional geographic differences. The government's measures play a crucial role in the relationship between unemployment and inflation, resulting in varying outcomes. Indonesia can implement monetary policy based on sharia principles, which aligns with policy theory by enacting a contractionary response to an increase in inflationary growth, while expansionary during an increase in the unemployment rate. However, Indonesia's dual monetary policy prioritizes the achievement of inflation targets, meaning that monetary authorities should take a more proportionate approach to tackle the issue of unemployment alongside inflation. To manage unemployment and the inflation rate effectively, Indonesia needs to establish an environmentally-friendly business environment with reduced taxes and deregulation. In conclusion, Indonesia's experience underscores the importance of effective government measures and proportional monetary policy responses in addressing the issue of unemployment alongside inflation.