Back to Assignment Attempts: 0 10. Inflation and unemployment Suppose that the g

Question

Back to Assignment Attempts: 0 10. Inflation and unemployment Suppose that the government believes the economy is producing goods and services beyond its optimal level. The government therefore decide Average: 0/2 decrease the quantity of money in the economy. the economy's demand for goods and services, leading to roduct prices. In the short run, t level of unemployment. This monetary policy p change in prices induces firms to produce goods and services. This, in turn, leads to a In other words, the economy faces a trade-off between inflation and unemployment: Lower inflation leads to Y unemployment. ve & Contin

Explanation / Answer

If the government reduces the quantity of money then money supply in economy reduces which leads to decrease in quantity demanded of goods because people have less cash to spend. As demand decreases than prices fall down in the economy.

According to supply law, if prices reduce then supply of goods and services also reduces. Therefore, firms demand less labor for production so that unemployment rises. According to Phillips curve, lower the inflation, the higher the unemployment.

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