Learning Path
Question & Answer1
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Explore TopicChoose the Best Answer
A
It may lead to higher employment with controlled inflation.
B
It would definitely increase inflation without impacting employment.
C
It would reduce both unemployment and inflation.
D
It will increase unemployment while lowering inflation.
Understanding the Answer
Let's break down why this is correct
Answer
Expansionary monetary policy lowers interest rates to encourage borrowing, spending, and hiring, which can lift employment. When the same central bank also targets a specific inflation rate, it must watch how the extra demand pushes prices. If the economy is already near full capacity, the increased spending can raise prices above the target. To keep inflation in check, the bank may later raise rates or tighten policy. For example, cutting rates from 2 % to 1 % can boost jobs, but if prices rise to 3 % the bank will tighten again to bring inflation back to 2 %.
Detailed Explanation
An expansionary policy lowers interest rates, so borrowing becomes cheaper. Other options are incorrect because The belief that money automatically makes prices higher ignores that the central bank watches inflation and can tighten policy if prices rise; Assuming both unemployment and inflation fall together misses the bank’s balancing act.
Key Concepts
Impact on Employment Levels
Inflation Targeting
Topic
Expansionary Monetary Policy Effects
Difficulty
medium level question
Cognitive Level
understand
Practice Similar Questions
Test your understanding with related questions
1
Question 1When a central bank adopts inflation targeting, what is the primary goal of this monetary policy approach?
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2
Question 2How does an expansionary monetary policy typically influence employment levels during an economic recession?
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3
Question 3If a central bank implements an expansionary monetary policy by lowering interest rates, what is likely to happen to unemployment in the short run?
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