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

Question

Quizplus · Accepted Answer

Expanding aggregate demand typically means increasing government spending or decreasing taxes, which leads to an increase in consumer and business spending. This increase in spending leads to an increase in both inflation and employment. However, in the short term, there is a greater effect on employment than on inflation. Therefore, at first, inflation may rise only slightly while unemployment falls more dramatically. As the economy reaches full employment, the inflation effect becomes greater, and inflation rises while unemployment falls less quickly. Thus, the best choice is D: inflation rises, but unemployment falls.

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