Inflation and unemployment

Suppose that the government believes the economy is not producing goods and services at its optimal level. In an attempt to stimulate the economy, the government increases the quantity of money in the economy by printing more money.

This monetary policy action demand for goods and services in the economy, leading to prices for products. In the short run, the change in prices induces firms to produce goods and services. This, in turn, leads to a unemployment level.

Based on this analysis, the economy faces the following trade-off between inflation and unemployment: Higher inflation leads to unemployment.