If decision makers adjust fully to demand stimulus policies, persistent expansionary macro-policy will lead to
A) inflation with no lasting reductions in unemployment.
B) a permanent reduction in unemployment.
C) lower interest rates.
D) more rapid economic growth.

Question

Quizplus · Accepted Answer

If decision makers fully adjust to demand stimulus policies, persistent expansionary macro-policy will eventually lead to inflation as increased demand leads to higher prices. This will not lead to a permanent reduction in unemployment as inflation erodes the purchasing power of wages and prices adjust to the new level of demand. Lower interest rates and more rapid economic growth may occur in the short term, but these will be temporary if inflation persists.

If Decision Makers Adjust Fully to Demand Stimulus Policies, Persistent