Question

Suppose that the central bank in this economy is concerned that inflation is too high and wants to lower the inflation rate by 6 percentage points per year. A reduction in the rate of inflation is known as d sinflation . To reduce inflation from 8% to 2% in the short run, the central bank would have to accept an unemployment rate of ____________ .
a. True
b. False:

Answer 1

Answer:

a) True

Explanation:

We can not determine the exact percentage by which a 6% reduction in inflation will cause a hike in unemployment but this conclusion is true. As per the Philips Curve, inflation and unemployment are in an inverse relationship

This is to say an increase in one will cause a decrease in the other and vice versa. This relationship however is not linear and so the degree of changes one variable causes in another will depend on the economy and statistics of the economy.

Hope that helps.