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How would a permanent reduction in inflation impact menu costs and unemployment? a. It would permanently...

How would a permanent reduction in inflation impact menu costs and unemployment? a. It would permanently reduce menu costs and permanently lower unemployment. b. It would permanently reduce menu costs and temporarily raise unemployment. c. It would temporarily reduce menu costs and temporarily lower unemployment. d. It would temporarily reduce menu costs and temporarily raise unemployment.

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Answer #1

Answer : The answer is option b.

Inflation level permanently decrease means price level permanently decrease. Due to permanently decreasing price level the menu cost permanently decrease.There is a negative relationship between inflation and unemployment. As here inflation level permanently decreases hence the unemployment level increases temporarily. Because when inflation level permanently decrease then wage rate decrease. Due to lower wage rate the demand for labor will increase which will increase the employment level. As a result, when inflation permanently decrease then at first unemployment level increase and then it will decrease after a certain time period. Therefore, option b is correct.

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