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Critique of a Policy Proposal
Critically evaluate the policy advisor's proposal. Based on the principles of long-run economic adjustment in this type of economy, is the advisor's claim that a higher inflation target will permanently lower the unemployment rate to 3% correct? Justify your reasoning.
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Critique of a Policy Proposal
A political leader in a country with a flexible exchange rate and an independent central bank announces a plan to use monetary policy to permanently reduce the unemployment rate to 2%, which is well below the country's estimated long-run supply-side equilibrium unemployment rate of 5%. The leader also promises that the central bank's inflation target of 3% will be maintained. Why is this dual objective fundamentally problematic in the long run?