THE LABOUR MARKET
225
reduce unemployment because it is sure to obtain another term in office,
the economy will return to the natural rate of unemployment at point B.
However, now the economy has obtained a higher rate of inflation than
earlier. A
ONE
-
TIME
REDUCTION
IN
UNEMPLOYMENT
leads to a
permanent
increase
in the rate of inflation.
If the government decides to sustain a lower rate of unemployment,
u
−
u
*,
then in period 3, the new short-run Phillips curve P
3
P
3
will pass through the
point (
2
,
u
*). As long as the government continues to maintain, this rate of
unemployment given by
u
−
u
*, ...
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