Question

7. The Humphrey–Hawkins Act of 1978 required that the federal government maintain an unemployment rate of 4% and hold the inflation rate to less than 3%. What does the inflation-unemployment relationship tell you about achieving such goals?

Answer 1

short run Inverse relationship between the rate of unemployment and the rate of inflation is measured by the Phillips curve. this indicates that if the government is willing to reduce the rate of inflation it has to bear a greater rate of unemployment and to control unemployment it has to accept a higher rate of inflation in the short run.

This happens because policies that are aimed at reducing the rate of inflation, usually constrict the aggregate expenditure thereby increasing the rate of unemployment in the economy. Similarly policies that are aimed at reducing the rate of unemployment stimulate the aggregate expenditure resulting in a greater rate of inflation. therefore the goals described by the act of 1978 are difficult to achieve given the relationship between unemployment rate and inflation rate in the short run.