An economy has historically maintained a stable inflation rate when unemployment is at 5%. A new, permanent regulation significantly increases the cost of energy for all businesses. Following this change, policymakers observe that whenever they use economic stimulus to push unemployment back down to 5%, inflation begins to accelerate uncontrollably. What is the most logical conclusion to draw from this observation?
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An economy has historically maintained a stable inflation rate when unemployment is at 5%. A new, permanent regulation significantly increases the cost of energy for all businesses. Following this change, policymakers observe that whenever they use economic stimulus to push unemployment back down to 5%, inflation begins to accelerate uncontrollably. What is the most logical conclusion to draw from this observation?
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Following a permanent and significant increase in the global price of oil, a central bank can use monetary policy to return the economy to its original, pre-shock unemployment level without causing a sustained rise in the inflation rate.