Inflation and unemployment Suppose that the government believes the economy is producing goods and services beyond its optimal level. The government therefore decides to decrease the quantity of money in the economy. This monetary policythe economy's demand for goods and services, leading toproduct prices. In the short run, the change in prices induces firms to producegoods and services. This, in turn, leads to alevel of unemployment. In other words, the economy faces a trade-off between inflation and unemployment: Lower inflation leads tounemployment.

Decreases; lower; fewer; higher; higher

Explanation:

Suppose that the government believes the economy is producing goods and services beyond its optimal level. The government therefore decides to decrease the quantity of money in the economy. This monetary policy decreases the economy's demand for goods and services, leading to lower product prices. In the short run, the change in prices induces firms to produce fewer goods and services. This, in turn, leads to a higher level of unemployment. In other words, the economy faces a trade-off between inflation and unemployment: Lower inflation leads to higher unemployment.

Inflation can be defined as the persistent rise in the price of goods and services in an economy. This inflation usually results in an increase in the cost living, prices of an average-weighted basket of goods and services, and high unemployment rates among the people living in the country.

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