Impact of Monetary Policy on Inflation and Unemployment

Hard Macroeconomics Unemployment And Inflation

In an economy experiencing a rising inflation rate, policymakers are faced with the challenge of controlling inflation without inducing excessive unemployment. The Phillips Curve illustrates the inverse relationship between inflation and unemployment in the short run. Given the current economic conditions where inflation is spiraling upwards, which of the following options best describes a likely outcome of monetary policy aimed at reducing inflation?

Decreased inflation will lead to increased unemployment in the long run.

Increased interest rates will lower inflation but can lead to lower economic growth due to higher unemployment.

Monetary tightening will not affect inflation in the short term but will always reduce unemployment.

Hint

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