Suppose that, in an attempt to combat severe unemployment, the government decides to increase the amount of money in circulation in the economy. This monetary policy 1. (decrease, increase) the economy's demand for goods and services, leading to 2. (higher, lower) product prices. In the short run, the change in prices induces firms to produce 3. (fewer, more) goods and services. This, in turn, leads to a 4. (higher, lower) level of unemployment. In other words, the economy faces a trade-off between inflation and unemployment: Higher inflation leads to 5. (higher, lower) unemployment.

Question

Raindrop

Business

30 April, 02:05

Suppose that, in an attempt to combat severe unemployment, the government decides to increase the amount of money in circulation in the economy. This monetary policy 1. (decrease, increase) the economy's demand for goods and services, leading to 2. (higher, lower) product prices. In the short run, the change in prices induces firms to produce 3. (fewer, more) goods and services. This, in turn, leads to a 4. (higher, lower) level of unemployment. In other words, the economy faces a trade-off between inflation and unemployment: Higher inflation leads to 5. (higher, lower) unemployment.

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Dragon · Answer 1

Increase; higher; more; lower; lower

Explanation:

Expansionary policy is required to combat unemployment in the economy. If the government increases the money supply, the interest rate falls. This causes an increase in investment as lending becomes cheaper. Increase in investment causes an increase in the aggregate demand. Increased demand further causes the price level to rise.

Increase in prices will motivate producers to produce more. In order to increase output producers will hire more workers. Consequently, the rate of unemployment will fall. We see that at higher inflation unemployment is lower and vice versa. This means that there is a trade-off between inflation and unemployment.