Turkey reported an inflation rate of over 1,000 percent during a recent year.To reduce the inflation rate and not increase the unemployment rate, Turkey must

Question

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To reduce inflation without increasing unemployment, Turkey must decrease the growth of aggregate demand but must do so credibly. A credible announcement indicating a decrease in the growth of aggregate demand followed by action to decrease it will cause firms to reduce prices without decreasing output and employment, which would result in a temporary increase in unemployment. Therefore, choice B is the best option. Choice A is incorrect because an increase in government spending would increase the aggregate demand and lead to higher inflation rates. Choice C is incorrect because the surprise increase in money supply would increase inflation rate further. Choice D is incorrect because Turkey cannot reduce the natural unemployment rate that is determined by structural and institutional factors in the labor market. Choice E is incorrect because an increase in the growth of aggregate supply and potential GDP would also cause an increase in aggregate demand and lead to higher inflation rates.

Turkey Reported an Inflation Rate of Over 1,000 Percent During