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Macroeconomic policy
Macroeconomic policy trade-offs are likely along the short-run Phillips curve however are not maintainable in the long run. In the short run a government can choose between targeting the level of unemployment or rate of inflation. In the short run expansionary fiscal policy can spur the economy and create jobs at the cost of a higher rate of inflation.
Though the capacity of economy is fixed in the short run. The economy's long-run Phillips curve is a vertical line whose position is fixed by economy's short-run productive capacity. It is impossible to trade off along this line in the long run between two policy targets of decreasing unemployment and decreasing inflation.
Assume that the money demand function is (M/P) d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is2. If the price level
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