If policy makers expand aggregate demand, they can lower unemployment ____, but only by ____.
A)temporarily; decreasing inflation
B)temporarily; increasing inflation
C)permanently; decreasing inflation
D)permanently; increasing inflation

Question

If policy makers expand aggregate demand, they can lower unemployment ____, but only by ____.
A)​temporarily; decreasing inflation
B)​temporarily; increasing inflation
C)​permanently; decreasing inflation
D)​permanently; increasing inflation

Quizplus · Accepted Answer

Expanding aggregate demand will initially lower unemployment, but it will do so only temporarily by increasing inflation. When there is an increase in demand for goods and services, businesses will see an increase in their profits, which will lead to an increase in the demand for labor. This will lead to a decrease in unemployment. However, the increase in demand will also lead to an increase in prices, which will eventually lead to an increase in inflation. As prices rise, businesses will face higher costs, which will lead to a decrease in profits and a decrease in the demand for labor. As a result, unemployment will rise again.

If Policy Makers Expand Aggregate Demand, They Can Lower Unemployment