Explain different types of Unemployment and Inflation. How are these two concepts related?
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Compare the Long Run and Short Run Phillips curve. Why is Short Run Phillips curve sometimes called Expectations-Augmented Phillips curve and Long Run Phillips curve is called NAIRU.
Read the Case Study below and answer both questions:
On July 3, 2019, the Executive Board of the International Monetary Fund (IMF) approved a 39-month extended arrangement for Pakistan for about US$6 billion loan. Large fiscal deficits, loose monetary policy, and defense of an overvalued exchange rate had increased consumption and short-term term economic growth, but increased external and public debt, and depleted international reserves while also making exports uncompetitive. So, to avoid default which could lead to hyperinflation, this loan had to be taken.
Following the IMF decision, Mr. David Lipton, First Deputy Managing Director said*:
“Pakistan is facing significant economic challenges…. High fiscal deficit…. and weak and unbalanced growth. (The IMF) program aims to tackle long-standing policy and structural problems, restore macroeconomic stability, … and promote strong and sustainable growth.
(Reducing) the fiscal (Deficit) will require a multi-year revenue mobilization strategy to broaden the tax base and raise tax revenue. It will also require a (support of) the provinces to (reduce expenditure) and to improve the quality and efficiency of public spending.
An adequately tight monetary policy will be key to correcting imbalances, rebuilding reserves, and keeping inflation low.”
This is the 23rd time that Pakistan has been part of an IMF program, yet as in the past again the economy finds itself in the worse of both worlds—low economic growth and high inflation.
Would you say that Pakistan’s economy is facing Stagflation? If so, is there a supply shock that explains this stagflation?
Is there prolonged Stagflation in Pakistan? As such do you think the monetary and fiscal policy recommendations of the IMF director as quoted in the passage above can solve this problem?