Question

In the short run, which of the following rates of growth in the money supply is likely to lead to the lowest level of unemployment in the economy?A. 5 percent per year B. 3 percent per year C. 9 percent per year D. 7 percent per yea

Answer 1

Answer:

C) 9 percent per year

Explanation:

In the short run an increase in the money supply should increase total output in the economy, decreasing unemployment. Therefore, the larger the increase in the money supply, the larger the decrease in unemployment.

But in the long run it will also increase the inflation rate, increasing the interest rates and producing a boomerang effect which will lower the money supply and increase unemployment.  

The Fed should try to maintain low, stable interest rates, not roller coaster type interest rates.