Do you agree that there is a long run trade off between inflation and output, an

Question

Do you agree that there is a long run trade off between inflation and output, and that maintaining an “overly low” inflation rate will lead to output remaining below capacity indefinitely? Was the adoption of inflation strategy in Canada successful or not in long run? Do you agree that there is a long run trade off between inflation and output, and that maintaining an “overly low” inflation rate will lead to output remaining below capacity indefinitely? Was the adoption of inflation strategy in Canada successful or not in long run?

Explanation / Answer

In short run, there is tradeoff between the inflation and output. Actions to reduction inflation would cause reduction in output as well. But experiences of USA, UK and Canada show that low inflation and high demand can co-exist. Initially, when inflation is lowered, output also operate below the potential level. But as low inflation target is achieved , demand again starts picking up and output starts increasing. Thus, economy now operates at full potential level. Canada low inflation strategy was successful in long run, since in long run low inflation and high output can co-exist.

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