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A government is trying to reduce inflation but this has led to higher unemployment. Explain the...


A government is trying to reduce inflation but this has led to higher unemployment. Explain the role of the prices stickiness in causing this tradeoffs?





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At the time of inflation, government try to control it with the help of increasing taxes and reducing government spending .In this aggregate demand will reduce. And inflation will control. But due to that another problem will rise. Problem of unemployment. The reason is wage and price stickiness. When due to reduction in demand , supply will reduce but due to same wage and prices firm will incur losses. To cover the losses , they will laid out worker and unemployment will increase. Therefore, if government try to control the inflation, it leads to increase in unemployment.

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