Principles of Macroeconomics 7th Edition

Published by South-Western College
ISBN 10: 1-28516-591-8
ISBN 13: 978-1-28516-591-2

Chapter 22 - The Short-Run Trade-off between Inflation and Unemployment - Questions For Review - Page 502: 1

Answer

The Fed can impact the curve by changing the money supply. Increases in money supply reduce the unemployment rate and increase the inflation rate as prices rise to account for the greater circulation of currency. Decreases in money supply increase the unemployment rate and decrease inflation with lowered amount of money in circulation.

Work Step by Step

To understand this concept think of it in a global context. Examine a basic Phillips curve and understand that as more money is in circulation it is accompanied with rising in prices (inflation) and vice versa.
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