Increase inflation and have no impact on unemployment

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Reference no: EM131376575

West Paragon, a developed economy, has been experiencing stable and low inflation for the last two years. There is consensus that the current unemployment rate of 4 percent is also its natural rate of unemployment. However, the country's GDP growth is stagnating and the government of West Paragon is worried about a possible slowdown. Given the situation, members of the government believe that the central bank should increase money supply in order to stimulate growth. Analysts at a leading economic research institute however believe that increasing money supply will only raise inflation and will not have any positive impact on unemployment.

In claiming that an expansionary monetary policy will only increase inflation and have no impact on unemployment, the analysts are assuming that:

A. wages and prices are sticky in the short run.

B. the natural rate of unemployment should be lower than 4 percent.

C. the economy is not on the long-run Phillips curve.

D. people accurately interpret all available information to form reliable forecasts.

E. people are risk-averse.

Reference no: EM131376575

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