Due to historical differences,countries often differ in how quickly a change in

Question

Due to historical differences,countries often differ in how

quickly a change in actual inflationis incorporated into a

change in expected inflation. In acountry such as Japan that

has had very little inflation inrecent memory, it will take

longer for a change in the actualinflation rate to be reflected

in a corresponding change in theexpected inflation rate. In

contrast, in a country such asArgentina, one that has recently

had very high inflation, a change inthe actual inflation rate

will immediately be reflected in acorresponding change in the

expected inflation rate. What doesthis imply about the shortrun

and long-run Phillips curves in thesetwo types of countries?

What does this imply about theeffectiveness of

monetary and fiscal policy to reduce theunemployment rate?

Explanation / Answer

Phillip curve is a tradeoff between inflation and unemployment.

Monetary and fiscal policy to solve unemployment will be moreeffective in Argentina than in Japan, because there is no time lagin determining the level of unemployment and expectations. However,from another point of view, monetary and fiscal policy will be moresustainable in Japan because of less drastic changes inunemployment and expectations.

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