Question

True or False with brief explanation

1-In a country we observe an increasing inflation rate. Then we can conclude that the unemployment rate must be above the natural rate of unemployment.

2) Assume that some labor contracts provide wage indexation to current inflation. Then, a given reduction in the unemployment rate has a weaker inflationary effect than in the basic case with no wage indexation.

Answer 1

1) False

Rising inflation imply that aggregate demand in the Economy is higher , thus both output & employement is higher than the natural level, so unemployment rate must be below the natural rate level.

2) false.

As wage indexation imply that as inflation rise, wages also increase in a fixed proportion to the inflation rate.

So as unemployment rate is lower, as per Phillips curve, in short run , inflation rate rise, hence if wage indexation is there , than nominal wages automatically rise,thus price also rise,bcoz of operation of wage price spiral.

Thus inflationary effect will be stronger than the case of no indexation.