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_____. To reduce inflation from 8% to 2% in the short run, the central bank would have to accept an unemployment rate of_______%.
If people have rational expectations, the economy may not have to endure an unemployment rate as high as predicted by the short-run Phillips curve.
A. True
B. False

Answer 1

Answer:

i) Dis-inflation

ii) 9%

iii) True

Explanation:

A reduction in the rate of inflation is known as Dis-inflation and for the central bank to reduce inflation from 8% to 2% the central bank would have to accept a 9% unemployment rate

This can be proved  below using this relationship

reduction of inflation = new inflation ( Δ u )  

where Δ u = change in unemployment

hence increase in unemployment  will be

Reduction of inflation / new inflation

= 6% points / 2%  = 3%

From the intersection of the short-run Philips curve and the long run Philips curve when the inflation rate is at 8% the unemployment rat is at 6% and when the inflation rate falls to 2% the unemployment rate rises to 9% ( 6% + 3% ) the calculation above supports the effect of the reduction in inflation rate on unemployment rate

Due to Rational expectations from the people they will have to endure an unemployment as high as predicted this is in order to ensure a strong purchasing power for the currency ( True )

Answer 2

The correct words to fill the given blanks in the context of the excerpt would be as follows:

1). The term employed to denote the fall in inflation rate is called;

- Disinflation

2). The rate of inflation that the government will have to tolerate to reduce it to 2% would be:

- 9%

3). The claim proposed regarding the people's rational expectations preventing the excess rate of unemployment would be considered:

 True

1). 'Disinflation' is described as the terminology that is employed to refer to the process by which the rate of inflation is provisionally downturned.

2). In order to bring a fall in the rate of inflation, the government may have to tolerate a temporary hike of being it at 9% as the association shown below:

As we know,

The fall in reduction = Δu(The new rate of inflation)

with Δu denoting the alteration in the rate of unemployment

∵ Increase in unemployment  = Reduction of Inflation ÷ New rate of Inflation

= 6% ÷ 2%  

= 3%

In order to reduce the rate to 2%,

The temporary rate of inflation would be 6% + 3% = 9%

3). In the situation of people having reasonable expectations, the inflation rate would be limited as purchasing power would be saved for necessary items as unnecessary wants are the primary cause of reduced purchasing power and unemployment. Thus, it is true.

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