Question

1. What effect will a reduction in inflation have on unemployment in the Long Run? Explain how you would know this. (hint: think of a particular economic concept/graph that explains this).

Answer:    (circle the correct answer)   

Unemployment will go up

Unemployment will go down

Unemployment will not change

Explanation:                                                                                                                                  

Answer 1

A reduction in the rate of inflation in the long run has no effect on the rate of unemployment, it will remain almost same or will change a bit due to some other factors. This is because the rate of inflation effects the rate of unemployment only in short run.

This can be understood with the concept of the Phillips Curve which was given by A. W. Phillips, in his study he analysed the data on inflation and unemployment and found that there is an inverse relationship between inflation and unemployment i.e. unemployment decreases as inflation increases and vice-versa. But as economists analysed the relationship they found that this was not the case always as there is trade off between inflation and unemployment in the short run only but not in the long run.

Though reduction in inflation can increase the rate of unemployment in the short run, but in long run it is not possible and hence the rate of unemployment will remain same.