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    GDP and unemployment

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    In a monetary policy designed to slow inflation, what are the risks to other macroeconomic measures such as real GDP and unemployment? How can the monetary authority mitigate these risks?

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    Inflation means the price level is increasing. In order to stop this price increase the monetary authority has to increase interest rates to slow down the economy. Recall the ISLM framework. Let's look at two scenarios.

    case 1
    The new economy is booming. The economy is expanding rapidly unemployment is falling, gdp is growing and inflation is setting in. Assume we are at 7% interest rate. The fed decides to increase the interest rates to discourage investment and consumer consumption. This is an ...

    Solution Summary

    GDP and unemployment are highlighted.