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darla darla
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5 years ago
Suppose a presidential candidate makes a statement in a debate whereby he promises that he would encourage the Fed to permanently lower the unemployment rate to 3%. His opponent claims that this type of policy idea is mired in the 1960s and would only cause inflation.  Explain what the oAnswer: means.
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InMacro

InMacro


Edition: 1st
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5 years ago
means.
Answer: An increase in the money supply will raise GDP above potential GDP and lower the unemployment rate below the natural rate in the short run. To attempt to keep the level of GDP above potential continuously in the long run, and subsequently keep the unemployment rate permanently below the natural rate, the Fed would have to continuously keep raising the money supply.  This would be inflationary.
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