Discuss, using the Philips Curve, the effect of a policy aimed at lowering the inflation rate.
What will be an ideal response?
When policy makers decide the inflation rate is too high and needs to be lowered it will not only influence the purchasing power of money, but also the unemployment rate. The short-run Philips Curve shows that a decrease in the inflation rate will increase the unemployment rate. However, in the long-run the unemployment rate will move back to its natural level.
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Suppose a depression results in for thousands of people in a country losing their jobs. Unable to find jobs, many people are unable to afford a proper diet and some have committed suicide. We can say that unemployment results in _____
a. a loss of lifetime earnings b. a loss of human capital c. the deterioration of health d. a loss of social cohesion
If the inflation rate is 2% and the nominal interest rate is 1%, then the real interest rate is around
A. 2%. B. 3%. C. 1%. D. -1%.