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Question & Answer
Choose the Best Answer
It may lead to higher employment with controlled inflation.
It would definitely increase inflation without impacting employment.
It would reduce both unemployment and inflation.
It will increase unemployment while lowering inflation.
Understanding the Answer
Let's break down why this is correct
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
Expansionary Monetary Policy Effects
medium level question
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Deep Dive: Expansionary Monetary Policy Effects
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Definition
Expansionary monetary policy involves the central bank reducing interest rates to stimulate aggregate demand, leading to increased output and decreased unemployment. This policy aims to address cyclical unemployment and boost real income in the short run.
Topic Definition
Expansionary monetary policy involves the central bank reducing interest rates to stimulate aggregate demand, leading to increased output and decreased unemployment. This policy aims to address cyclical unemployment and boost real income in the short run.
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