Policy Dilemma and Inflation Dynamics
Imagine a country where economists estimate the long-run sustainable rate of unemployment to be 5%. However, due to political pressure, the government mandates a new policy objective: to maintain the unemployment rate at 3% indefinitely through expansionary monetary and fiscal policies. Analyze the likely long-term consequences of this policy on the country's inflation rate. In your analysis, explain the mechanism that would cause the inflation rate to continuously accelerate rather than simply settling at a new, stable, but higher level.
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Introduction to Macroeconomics Course
Ch.4 Inflation and unemployment - The Economy 2.0 Macroeconomics @ CORE Econ
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