Question

This monetary policy __________ the economy's demand for goods and services, leading to__________ product prices. In the short run, the change in prices induces firms to produce __________ 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: Lower inflation leads to_________ unemployment
a)Decreases
b)lower
c)fewer
d)higher

Answer 1

The correct answer is: increase; rise; more; lower; option d.

Step-by-step explanation:

An expansionary monetary policy leads to an increase in the money supply. This further causes the demand for goods and services increase. A rightward shift in the aggregate demand curve causes the price level to rise.

At a higher price level, the firms will produce more goods and services. To increase output, they will need more inputs. As a result, the rate of unemployment will decrease.

We see that there is a trade-off between inflation and unemployment. At lower inflation, the rate of unemployment will be higher and vice versa.