10 Inflation and unemployment Suppose that in an attempt to

10. Inflation and unemployment 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 change in prices induces firms to produce the economy\'s demand for goods and services, leading to product prices. In the short run, the ? level of unemployment. goods and services. This, in turn, leads to a In other words, the economy faces a trade-off between inflation and unemployment: Higher inflation leads to ? unemployment.

Solution

The monetary policy increases the nation\'s demand for goods and services leading to higher product prices. In the short run, the change in the prices induces the firms to produce more goods and services. This, in turn, leads to a lower level of unemployment. In other words, the economy faces a trade-off between inflation and unemployment: Higher inflation leads to lower unemployment.