Sentence Elimination -Inflation and Unemployment

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Sentence Elimination- Inflation and Unemployment

  1. Inflation, which increases nominal but not real wages, is assumed to trick workers into accepting a lower remuneration for their services; it is thus an indirect wage cut that helps prevent an increase in unemployment.
  2. An economic concept that serves as the linchpin for monetary policy makers is that wages are quite inflexible in a market economy, so unemployment is bound to shoot up whenever workers refuse to accept lower wages.
  3. The stagflation of the 1970s proved quite convincingly that high unemployment and high inflation can very well co-exist, and given that wages may not be as rigid as many economists assume, any effort to micromanage the economy may well be a fool’s errand.
  4. While framing monetary policies, central bank chiefs keep this inverse relationship in mind, trying to maintain a non-accelerating inflation rate of unemployment, which is the unemployment rate at which inflation too is just under control.

 

  • Correct Answer
    Choice C

Detailed Solution



The link between sentences A and B is the reference to lower wages/remuneration in each.

Sentence A states that inflation “is assumed to trick workers into accepting a lower remuneration” and calls inflation “an indirect wage cut that helps prevent an increase in unemployment”. That is, an increase in inflation prevents an increase in unemployment.

Sentence B too refers to wages, noting that they are inflexible in a market economy. Unemployment goes up when there is a situation where workers have to accept lower wages.

A follows B. Wages are inflexible. Unemployment goes up when wages have to be reduced. However, inflation tricks workers into accepting lower wages for their services, thereby preventing an increase in unemployment.

Now, sentence C declares any effort to micromanage the economy as a “fool’s errand”, based on two points. One, that the stagflation of the 1970s proved that both high unemployment and high inflation can co-exist. Two, wages may not be as rigid as many economists assume. The ideas put forth in sentence C do not seem to relate to sentences B and A, both of which refer to inflation as a possible means of preventing an increase in unemployment.

Sentence D, on the other hand, talks of “this inverse relationship” which central banks keep in mind while framing monetary policies.

BAD makes a cogent paragraph. Sentence C is the one to be eliminated.

Correct Answer: Choice (C)



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