Quizzol

QUESTION:

10. Inflation and unemployment

Suppose that, in an attempt to combat severe inflation, the government decides to decrease the amount of money in circulation in the economy.

This monetary policy action demand for goods and services in the economy, leading to prices for products. In the short run, the change in prices induces firms to produce goods and services. This, in turn, leads to a unemployment level.

Based on this analysis, the economy faces the following trade-off between inflation and unemployment: Lower inflation leads to unemployment.

ANSWER:

Suppose that, in an attempt to combat severe inflation, the government decides to decrease the amount of money in circulation in the economy.

This monetary policy action decreases Correct

demand for goods and services in the economy, leading tolower Correct

prices for products. In the short run, the change in prices induces firms to producefewer Correct

goods and services. This, in turn, leads to ahigher Correct

unemployment level.

Points:

1 / 1

Based on this analysis, the economy faces the following trade-off between inflation and unemployment: Lower inflation leads tohigher Correct

unemployment.

Points:

1 / 1

When the government uses monetary policy to decrease the quantity of money, then the demand for goods and services decreases. This change in the demand will lead to lower prices, causing firms to produce fewer goods and services—which requires fewer workers. Therefore, lower prices lead to higher unemployment levels in the short run.

The economy faces a trade-off between inflation—an increase in the overall price levels—and unemployment in the short run. In particular, higher inflation rates usually correspond to lower unemployment levels, while lower inflation rates correspond to higher levels of unemployment.

Posted by Cleveland on August 28, 2024