4. Over the past few years, a number of politicians have argued that the rate of unemployment can be lowered permanently, well below 4%. Some have argued that the Federal Reserve should concern itself with eliminating unemployment rather than paying attention to whether inflation is 2% or 3%. Write a one-page essay discussing the merits and demerits of this viewpoint, using graphs and equations when helpful.
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The statement suggests that it is more important to focus on eliminating unemployment rather than worrying about whether inflation is at 2% or 3%. This implies that the priority should be on creating jobs and reducing unemployment rates. Show more…
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Inflation and Unemployment Suppose that, in an attempt to combat severe unemployment, the government decides to increase the amount of money in circulation in the economy. This monetary policy increases the economy's demand for goods and services, leading to higher product prices. In the short run, the change in prices induces firms to produce fewer goods and services. This, in turn, leads to a higher level of unemployment. In other words, the economy faces a trade-off between inflation and unemployment: Higher inflation leads to lower unemployment.
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Many economists argue as follows: "Because there is no long-run tradeoff between unemployment and inflation, there is no point in trying to shave the peaks and troughs from the business cycle." This view suggests that we should not care whether the economy is stable or fluctuating widely as long as the average level of unemployment is the same. Discuss critically.
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