Answer to Question #153140 in Macroeconomics for juliana

Question

Suppose the Fed begins carrying out an expansionary monetary policy
in order to close a recessionary gap. Relate what happens during the
next two phases of the inflation-unemployment cycle to the maxim
“You can fool some of the people some of the time, but you can’t fool all
of the people all of the time.”

Answer 1

Expansionary monetary policy will lead to shifting out of the demand curve leading to falling in unemployment and a rise in inflation. Households will realize that their real wages have fallen due to higher inflation. Hence, they will now demand higher nominal wages. This leads to higher costs for firms, leading to shifting in the supply function. This results in rising in unemployment.