I am wondering if my answers are correct or not, thank you. Suppose that the gov

Question

I am wondering if my answers are correct or not, thank you.

Suppose that the government believes the economy is not producing goods and services at its optimal level. In an attempt to stimulate the economy, the government increases the quantity of money in the economy by printing more money This monetary policy decreases the economy's demand for goods and services, leading to higher product prices. In the short run, the change in prices induces firms to produce fewer goods and services. This, in turn, leads to a higher level of unemployment. In other words, the economy faces a tradeoff between inflation and unemployment: Higher inflation leads to higher unemployment.

Explanation / Answer

Ans. This is a very interesting question , Let's start with the explanation first and then we will move towards filling the Blanks.

If Government increases the Supply of Money by Printing More Currency then People would be having More money to spend , which means that the Demand of Goods and Services in the Economy will rise. If people would be demanding more and supply of the goods remains constant , then Sellers would be induced to increase the Prices of the Goods to earn more Profits. In order to earn some more profits , firms starts Producing More and more, thus production of goods and services increases. This would logically lead to firms employing more workers thus it would lead to lower level of unemployment. We can say that as Inflation increases , Unemployment decreases ( inverse relation between inflation and unemployment by Phillips Curve )

I hope we'd be able to fill all the blanks using this explanation.

This monetary policy INCREASES the economy demand for goods and services leading to HIGHER market prices in the short run. The change in prices induces the firms to produce MORE goods and services .This in turn leads to LOWER level of unemployment.

In other words the economy faces A trade off between inflation and unemployment : higher inflation leads to LOWER level of unemployment.

I hope you understood the answer. Do ask in case of any doubts.

A Thumsup would be highly Appreciated!!

Best of Luck !! Keep Chegging !!

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