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Very, Very Unlikely Fed Can Tame Inflation Without Sparking Recession

EconEye Admin

The Fed’s mission is to crush inflation without causing recession. The chances of pulling this off are very, very low because they have to push up the unemployment rate.—CNN Business

Answer the following questions to check your understanding of the story.

Which economic model illustrates a tradeoff between inflation and unemployment?

What does the long-run Phillips curve illustrate? Do the aggregate supply and aggregate demand model or the quantity theory of money say anything about unemployment?

The short-run Phillips curve shows the tradeoff between the inflation rate and the unemployment rate holding constant the expected inflation rate and the natural unemployment rate.

In the first quarter of 2022, the U.S. unemployment rate was 3.8 percent, the natural unemployment rate was 4.4 percent, and the inflation rate was 6.1 percent. How would the unemployment rate change if the Fed “crushed inflation”?

The unemployment rate would ______________ to _____________ than the natural unemployment rate.

In the first quarter of 2022, the inflation rate is above the expected inflation rate and the unemployment rate is less than the natural unemployment rate. If the Fed “crushed inflation”, the economy would move down along the short-run Phillips curve. What happens to the unemployment rate?

In the first quarter of 2022, the inflation rate is above the expected inflation rate and the unemployment rate is less than the natural unemployment rate. If the Fed “crushed inflation”, the economy would move down along the short-run Phillips curve so that the inflation rate . would fall below the expected inflation rate and the unemployment rate would increase above the natural unemployment rate.

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