If macroeconomic policy expands aggregate demand, unemployment will fall and inflation will rise in the short run.

Question

Quizplus · Accepted Answer

When macroeconomic policy expands aggregate demand, it encourages businesses to produce more which creates jobs and reduces unemployment in the short run. However, as demand surpasses the capacity of the economy to produce output, prices will rise, resulting in inflation, also in the short run.

If Macroeconomic Policy Expands Aggregate Demand, Unemployment Will Fall and Inflation