Suppose fiscal policymakers increase aggregate demand in an attempt to decrease the unemployment rate below the natural rate of unemployment.What will be the only lasting effect?

Question

Quizplus · Accepted Answer

When policymakers increase aggregate demand, it leads to an increase in both output and prices. The increase in prices (inflation) reduces the competitiveness of the economy and eventually negates the effects of the demand stimulus, bringing output back to its natural rate. Therefore, the only lasting effect of the policymakers' action is rising prices.

Suppose Fiscal Policymakers Increase Aggregate Demand in an Attempt to Decrease