Attempts by the government to reduce the rate of inflation often result in higher unemployment in the short run.

Question

Quizplus · Accepted Answer

This is known as the Phillips Curve trade-off. When the government uses contractionary monetary or fiscal policies to reduce inflation, it can result in lower aggregate demand and increased unemployment. However, in the long run, the Phillips curve relationship may shift, and it is possible to achieve lower inflation without causing as much unemployment.

Attempts by the Government to Reduce the Rate of Inflation