Assume an economy is operating at full employment and that the central bank announces a decrease in the growth rate of the money supply to reduce inflation, which market participants do not believe is credible. In the short run, are the directions ofthe 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? Short run: Long run: Employment and inflation effects Employment and inflation effects A. Same Same B. Same Different C. Different Same D. Different Different Answer: B Can someone explain why? Thanks
This stuff makes my head spin, here’s my best attempt. Since the policy is not credible the restrictive policy will cause both the inflation rate and employment(unemployment will rise) to both decrease in the short run. If you look at the SR Phillips curve, since the inflation rate turned out to be lower than expected, unemployment goes up. Inflation down, unemployment up which = employment down. Same direction. In the long run, you should know that the unemployment rate is inelastic and there is no trade off between inflation and unemployment i.e no change. However, inflation rate will still decrease. Different direction, one has no change, one decreases. Draw the Philips curve, it makes it easier to understand.
I really hate these questions that involve the Phillips Curve but ask about the effect on “Employment”. Throws me off every time.