The Central Bank's Inflation-Unemployment Trade-off After a Supply Shock
After a negative supply shock, a central bank with an inflation-targeting mandate faces a difficult trade-off rooted in public preferences. Voters typically oppose both rising inflation and falling employment. However, to fulfill its objective of controlling inflation, the bank must eliminate the inflationary bargaining gap. This requires reducing aggregate demand, which leads to lower employment. Consequently, the central bank cannot simultaneously achieve price stability and maintain the pre-shock level of employment.
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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
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