What would you choose?

A.) Full employment with a 6% annual rate of inflation
or
B.) Price stability with an 8% unemployment rate

What would you choose?

 

a ). Being employed = government making money

b ). Price Stablility and 8% unemployment wouldnt sound good since more money will be put into unemployment to pay out of work people. No job = no spending.

 

I forget, full employment = 5% unemployment rate, right?

If so, then B.

 

the range is between 4 -5 %

 

Is this a multiple choice answer or do you have to explain your reasoning?

 

You have to explain why you chose which one

 

It has been a while since I took Econ, but here goes:

For the first one, it is only natural that inflation will rise at full employment. As I am sure you know the price level = demand / supply where in this example demand is the money supply and supply are all available goods. With the price/wage spiral, prices increase to keep real dollar profits from dropping while wages increase to maintain purchasing power. Inflation is the cause of too much money (demand) with not enough supply. So, if inflation is increasing at a steady rate, your real dollar purchasing power has remained the same. So, if everyone is employed, while wages may increase, their purchasing power remains the same.