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The Bank of Canada and the government of Canada have agreed that the Bank will achieve...

The Bank of Canada and the government of Canada have agreed that the Bank will achieve an inflation rate target. Explain the conflict between inflation targeting and unemployment targeting in the short run. When the Bank pursues an inflation rate target and the current inflation rate is above the target​ rate, the unemployment rate​ ______ and the price level​ ______ in the short run.

A. ​increases; increases
B. ​increases; decreases
C. ​decreases; increases
D. ​decreases; decreases

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Answer #1

Option C.

  • The inflation rate refers to the rate of Increase in the general price level of goods and services in the economy.
  • When the bank pursuse an inflation rate target and the current inflation rate is above the target rate, the unemployment rate decreases and the price level increases in the short run.
  • We know that in short run, there is a negative relationship between the unemployment rate and the inflation rate but the price level and the inflation rate are directly related to each other.
  • When the inflation rate is above the target level, it means that the prices have increased and there is a demand pull inflation in which the demand exceeds the supply.
  • To create more supply Inorder to satisfy the demands, the firms are willing to employ more labour in short run which decreases the unemployment rate.
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