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Policy Trade-off: High Unemployment for Rapid Disinflation
A central bank policy approach to combat high inflation involves implementing tight monetary policy that accepts a rapid increase in unemployment as a trade-off for achieving a steep fall in the inflation rate. This strategy was notably used by the UK's Thatcher government in the 1980s.
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Economics
Economy
Introduction to Macroeconomics Course
Ch.5 Macroeconomic policy: Inflation and unemployment - The Economy 2.0 Macroeconomics @ CORE Econ
The Economy 2.0 Macroeconomics @ CORE Econ
CORE Econ
Social Science
Empirical Science
Science
Ch.7 Macroeconomic policy in the global economy - The Economy 2.0 Macroeconomics @ CORE Econ
Related
Initial Economic State Following an Inflation Shock in a Policy Simulation (Figure 4)
Policy Trade-off: High Unemployment for Rapid Disinflation
Core Components of CORE Econ's Inflation Tool (Parts 1-2)
Advanced/Extension Components of CORE Econ's Inflation Tool (Parts 3-4)
Evaluating Central Bank Policy Responses
A central bank is using an economic policy simulation to model its response to a sudden inflation surge. The simulation shows inflation has jumped to 5%, while the unemployment rate remains stable. The central bank's primary objective is to bring inflation back to its 2% target as quickly as possible, and it is willing to accept significant short-term economic costs to achieve this. Which of the following policy choices and immediate consequences best represents this aggressive, anti-inflationary stance?
An economy is in equilibrium with 2% inflation. It is then hit by a shock that causes inflation to rise. The central bank responds by tightening its monetary policy to bring inflation back to its target. Arrange the following events in the logical sequence that would be expected to unfold within a macroeconomic policy simulation.
Rationale for Economic Policy Simulations
Learn After
UK's Costly Disinflation Under the Thatcher Government (Early 1980s)
Policy Response to an Inflation Shock: Costly Recession to Prioritize Disinflation (Figure 5)
Evaluating a 'Cold Turkey' Disinflation Policy
A country is facing an annual inflation rate of 18%. The central bank implements a new, aggressive monetary policy. Within one year, the inflation rate drops to 6%, while the unemployment rate rises from 5% to 11%. Which statement best analyzes the trade-off inherent in the central bank's strategy?
Central Bank Policy Dilemma
A country is experiencing a prolonged period of very high inflation. To address this, its central bank adopts an aggressive, severely restrictive monetary policy. Arrange the following economic events in the most likely chronological order of their occurrence following the policy's implementation.
The Mechanism of Rapid Disinflation
When a central bank aggressively tightens monetary policy to achieve a rapid fall in a high inflation rate, a primary goal of this specific strategy is to simultaneously stimulate short-term economic growth to cushion the impact on employment.
Match each central bank monetary policy stance with its most likely short-to-medium term economic outcome.
When a central bank decides to combat persistently high inflation by implementing a severely restrictive monetary policy, it is often making a deliberate choice to accept a sharp, albeit temporary, rise in the ____ rate in order to bring prices under control more quickly.
Evaluating 'Shock Therapy' Disinflation
A country is experiencing a persistent and high inflation rate of 20%. The central bank is considering implementing an aggressive and rapid tightening of monetary policy, a 'shock therapy' approach, to bring inflation down quickly. Which of the following economic conditions would present the strongest argument against adopting this strategy?