Question

What tends to happen to the inflation rate if the Fed works to lower the unemployment rate? Why?

Answer 1

Answer:

The inflation rate increases because of increased spending.

Explanation:

In order to lower the unemployment rate, the government needs to increase production. Higher production needs more investment. The investment will increase if the cost of borrowing decreases. So the feds need to decrease the interest rate on borrowings.  

This decrease in interest rate will cause the investment to increase, as a result the firms will produce more. To increase production, they will need more workers. In this way, the unemployment rate will decrease.