Stabilization Policy Trade-offs

Policymakers often face an apparent trade-off between reducing unemployment and controlling inflation, an idea historically associated with the Phillips curve: policies that stimulate the economy to lower unemployment can also push inflation higher, and policies that fight inflation by cooling the economy down can raise unemployment. Most economists today believe this trade-off mainly holds in the SHORT run; in the long run, an economy tends to return to its own natural rate of unemployment regardless of the inflation rate, so a country cannot reliably trade a little more permanent inflation for a little less permanent unemployment forever.

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