If strong monetary policy stimulus is used to combat a recessionary gap, what will happen?
A)A rapid movement toward lower unemployment and higher inflation
B)A rapid movement toward lower unemployment and lower inflation
C)A slow movement toward lower unemployment and higher inflation
D)A slow movement toward lower unemployment and lower inflation

Question

Quizplus · Accepted Answer

Strong monetary policy stimulus, such as lowering interest rates, can increase the demand for goods and services which can lead to a decrease in unemployment. However, this can also cause inflation to rise as demand exceeds supply, which can lead to higher prices. Thus, the rapid movement toward lower unemployment and higher inflation is the likely outcome of using strong monetary policy stimulus to combat a recessionary gap.

If Strong Monetary Policy Stimulus Is Used to Combat a Recessionary