Briefly explain why monetary policy cannot beat both inflati

Briefly explain why monetary policy cannot beat both inflation and unemployment at the same time.

Solution

This is because monetray policy can target only one of these variables at a time. If it targets inflation and decides to keep it low, it will conduct a monetary contraction which reduces money supply. This would reduce total spending and so GDP will fall. Firms will hire few workers and so unemployment is increased. Although inflation target is achieved, but unemployment is increased in the process.

If it targets unemployment and decides to keep it low, it will conduct a monetary expansion which increases money supply. This would stimulate total spending and so GDP will rise. Firms will hire more workers and so unemployment is decreased. Once again, unemployment target is achieved, but inflation is increased in the process. Hence monetray policy can target only one of these variables at a time