Question

Is it preferable for central banks to primarily target inflation or unemployment? Why?

Short answer

Unemployment and inflation, both are primary macroeconomic variables that hold a considerable effect on the economy.

Step-by-step solution

Concept Introduction

Unemployment and inflation, both are primary macroeconomic variables that hold a considerable effect on the economy. The remarkable increase in any of these two can drag a healthy economy to a worse position. Now, this is inconceivable to tell that which one should be the primary target of the Central bank.

Explanation

The Short-run Phillips arc shows that there is a balancing between unemployment and inflation. Economists think that small inflation is beneficial for an economy and whole employment is not viable. So, this is anticipated to keep a healthy proportion between these two variables. And in a situation, a Central Bank should act as the circumstances demand.