Question

Suppose we have rational expectations about future inflation, and the Fed has decided to pursue an expansionary monetary policy!

How would the Fed’s decision affect the rate of unemployment? Do we have to worry about losing our job?

Answer 1

Expected future inflation means that there is a possibility of inflation which majorly occurs due to:-

1) increase in demand

2) decrease in supply

In which, increase in demand is the major cause most of the time. In expansionary monetary policy, the supply of money will be boosted instead, leading to increase in the money supply and even more demand leading to even more inflation. In short run, as the demand would rise, in order to produce more, producers will appoint more employees. Therefore, in short run, the unemployment would reduce.