True or False?
The statement is true. The only way the government can reduce the inflation rate without causing increased unemployment is to convince the public that it is really going to reduce the rate of monetary growth. It has an incentive to lie because if it can convince the public that money growth will decline and then not reduce it, the unemployment rate can be reduced. The public has to be convinced that the government is not lying before it will reduce the rate of growth of wages and prices in proportion to government's announced reduction of the rate of inflation. In the absence of credibility of the government, the public will only sufficiently reduce the rate of growth of wages and prices when it has learned, by observing increased unemployment, that the government has in fact reduced the rate of money growth.