10. Inflation and unemployment Suppose that the government believes the economy

Question

10. Inflation and unemployment 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 induces firms to produce the economy's demand for goods and services, leading to product prices. In the short run, the change in prices goods and services. This, in turn, leads to a level of unemployment. In other words, the economy faces a trade-off between inflation and unemployment: Higher inflation leads to

Explanation / Answer

The monetary policy increases the economy's demand for goods and services, leading to higher product prices. In short run, change in prices induces firms to produce more (higher quantity of) goods and services. In turn, this leads to a lower (decrease in the) level in unemployment.

In other words, economy faces a trade-off between inflation and unemployment. Higher inflation leads to Lower unemployment.

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