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Consider a country with two political parties, Party A and Party B. Party A cares more...

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Economics

Consider a country with two political parties, Party A and Party B. Party A cares more about unemployment than Party B, and Party B cares more about inflation than Party A. When Party A is in power, they choose an inflation rate of is, and when Party B is in power, they choose aninflation rate of g. We assume that A > B. The Phillips curve is given by t, = et - a (ut - Un).An election is about to be held. Assume that expectations about inflation for the coming year (represented by et) are formed before the election. (Essentially, this assumption means that wages for the coming year are set before the election.) Moreover, we can assume that both parties A and B have an equal chance of winning the election.If the central bank sets an inflation target and monetary policy is not affected by who wins the election because the central bank is independent, do the preferences of Party A and Party B matter?

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