Control of Inflation

... Control of Inflation The governments of most developed economies now appear to be primarily concerned with inflation and how to keep it down as opposed to maintaining full employment or restricting the money supply. However, unlike in other areas of the economy, the actions the government can take to control inflation are quite limited. This is because people and firms behave according to their expectations not only of inflation but also of what they consider the government will do. As a result of these implications, governmental actions to control inflation may not have the desired results. If the actions of the government are consistent, though, it will be possible for people's expectations to be built around what they believe the government will do. To illustrate an example of this, consider the following model. The short-run Phillips curve is believed to show the trade-off between jobs and inflation, although since the early

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