If policymakers reduce aggregate demand, what happens to inflation and unemployment?
A) Inflation and unemployment rise.
B) Inflation rises, but unemployment falls.
C) Inflation falls, but unemployment rises.
D) Inflation and unemployment fall.

Question

Quizplus · Accepted Answer

If policymakers reduce aggregate demand, it will lead to a decrease in economic activity and output. This, in turn, will result in a decrease in inflation as there will be less demand for goods and services. However, this reduction in demand will also lead to an increase in unemployment as businesses will have less need to hire workers when their sales are falling. Therefore, inflation falls, but unemployment rises.

If Policymakers Reduce Aggregate Demand, What Happens to Inflation and Unemployment