Assume an economy is operating at full employment and that the central bank announces a decrease in growth rate of money supply to reduce inflation, which market participants do not believe is credible. In the short run, are the directions of the impacts on employment and inflation the same or different, and in the long run, are the directions of the impacts on employment and inflation the same or different? ANS: short run: employment and inflation effects: SAME long run: employment and inflation effects: DIFFERENT Can someone explain this (hopefully with a description using curves)?
Assume a philips curve Bcoz inflation will be less than anticipated, unemployment will be higher. i.e employment lower. So Inflation and employment move in the same direction However in the long run, the short run curve will move down to adjust to the new expectations. But employment will remain at natural rate.
Thanks for the explanation. The questions asks for the “directions” of the impacts of employment and inflation. So if, in the short run, there is less employment, why is the “direction” of the impact on employment the same? I’m a bit confused. Is the questions worded awkwardly, or is it me?
Coz lets say u r expecting inflation to be 8% , but it is actually 7% so u move down on the curve.
Doesn’t that mean, in the short run the direction is different? Thanks again for your help. smeet Wrote: ------------------------------------------------------- > Coz lets say u r expecting inflation to be 8% , > but it is actually 7% so u move down on the curve.
No, inflation is going down and so is “EMPLOYment”. dont confuse it with unemployment