WHAT WOULD HAPPEN TO UNEMPLOYMENT AND OUTPUT IF THE CENTRAL BANK PURSUED A POLICY TO REDUCE INFLATION?–CASE OF ALBANIA

Abstract

Some of the main goals of policy makers in almost every country are low inflation and low unemployment and economic growth. Government policies are successful if it can be reached price stability and low unemployment. The goal of this paper is to analyze the effects of inflation expectations on unemployment rate in the Albanian economy, in the short and long run. To understand the link this study was focused on the Philips curve. Based on the theory of Philips curve it is stated that in order to reduce unemployment a higher level of inflation should be accepted or if there is a reduction in inflation, a temporary raise of unemployment rate will appear. Policymakers who control aggregate demand will face a short – run trade-off between inflation and unemployment. In the long – run, the classical dichotomy holds, unemployment returns to its natural rate, and there is not trade-off between inflation and unemployment.