Monetary Policy in Mokania
Mokania has had inflation of 15% for many years. Mokania establishes a new central bank, the Bank of Mokania, with the hopes of reducing the inflation rate.

-Refer to Monetary Policy in Mokania.The Bank of Mokania reduced inflation to its announced goal of 5%.However the unemployment rate was on average higher for many years after.A newspaper editorial argues that the unemployment rate had moved to this higher natural rate because (1)by itself the decrease in inflation had permanently increased unemployment and (2)that at the same time the central bank was fighting inflation the government of Mokania had made a large increase in the minimum wage.Which of these arguments is consistent with the Phillip's curve model?
A)both explanations 1 and 2
B)neither explanation 1 nor 2
C)explanation 1 but not explanation 2
D)explanation 2 but not explanation 1

Question

Monetary Policy in Mokania
Mokania has had inflation of 15% for many years. Mokania establishes a new central bank, the Bank of Mokania, with the hopes of reducing the inflation rate.

-Refer to Monetary Policy in Mokania.The Bank of Mokania reduced inflation to its announced goal of 5%.However the unemployment rate was on average higher for many years after.A newspaper editorial argues that the unemployment rate had moved to this higher natural rate because (1)by itself the decrease in inflation had permanently increased unemployment and (2)that at the same time the central bank was fighting inflation the government of Mokania had made a large increase in the minimum wage.Which of these arguments is consistent with the Phillip's curve model?
A)both explanations 1 and 2
B)neither explanation 1 nor 2
C)explanation 1 but not explanation 2
D)explanation 2 but not explanation 1

Quizplus · Accepted Answer

Explanation 2 is consistent with the Phillips curve model, which suggests that higher minimum wages can lead to higher unemployment. Explanation 1 is not consistent because the Phillips curve does not suggest that a decrease in inflation permanently increases unemployment.