Answer to Question #289287 in Macroeconomics for REE

Question

if the central bank is able to keep the inflation rate equal to the target inflation rate every period, will there be dramatic fluctuations in unemployment?

Answer 1

Solution:

There will be no dramatic fluctuations in unemployment.

 

The Phillips curve depicts the inverse relationship between inflation and unemployment. Low unemployment is associated with higher inflation, whereas high unemployment is associated with lower inflation and even deflation.

When the inflation rate matches the target inflation rate every period, inflation would be contained and the economy will witness low or balanced inflation. As such, there will be no dramatic fluctuations in unemployment as the economy will be stable.