A central bank can reduce inflation by reducing money supply growth, but it necessarily does so at the cost of permanently raising the unemployment rate.

Question

Quizplus · Accepted Answer

While reducing money supply growth can help control inflation, it does not necessarily result in a permanently higher unemployment rate. The short-term effect might see an increase in unemployment due to lower spending and investment, but over time, the economy can adjust, and unemployment can return to its natural rate.

A Central Bank Can Reduce Inflation by Reducing Money Supply