Society Faces a Short-Run Trade-off between Inflation and Unemployment

quantity of money, the short-run story is more complex and more controversial. Most economists Although a higher level of prices is, in the long run, the primary effect of increasing the describe the short-run effects of monetary injections follows.

· Increasing the amount of money in the economy stimulates the overall level of spending and thus the demand for goods and services.

· Higher demand may over time cause firms to raise their prices, but in the meantime it also encourages them to increase the quantity of goods and services they produce and to hire more workers to produce those goods and services.

· More hiring means lower unemployment.

This line of reasoning leads to one final economy wide trade-off ashore-run trade-off between inflation and unemployment.

Although some economists still question these ideas, most accept that society faces a short-run trade-off between inflation and unemployment. The simply means that, over a period of year or two many economic policies push inflation and and unemployment in opposite directions. Policymakers face this trade-off regardless of whether inflation and unemployment both start out at high levels (as they were in the early 1998s), at low levels (as they were in late 1990s) or someplace in between. This short-run trade-off plays a key role in the analysis of the business cycle the irregular and largely unpredictable fluctuations in economic activity, as measured TV the production of goods and services or the number of people employed.

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