In the short run, expansionary monetary policy by the Fed would
A) reduce unemployment at the cost of higher inflation.
B) reduce inflation at the cost of a rise in the natural rate of unemployment.
C) reduce inflation and leave the natural unemployment rate unchanged.
D) reduce both inflation and unemployment.
E) increase both inflation and unemployment.

Question

Quizplus · Accepted Answer

In the short run, expansionary monetary policy leads to lower interest rates, which in turn stimulates consumption and investment spending. This ultimately leads to an increase in demand and output, which reduces unemployment. However, this increase in demand can also put upward pressure on prices, leading to higher inflation. Thus, expansionary monetary policy can reduce unemployment at the cost of higher inflation.

In the Short Run, Expansionary Monetary Policy by the Fed