The However, those who borrow money would benefit

The Phillips curve can be used to explain the relationship between inflation, which affects the price level aspect of aggregate demand, and unemployment, which is dependent on the real output portion of aggregate demand. An increase in aggregate demand causes inflation and lower unemployment because businesses will tend to employ more workers to meet demand. When aggregate demand shifts to the right, as noted on the above aggregate economy graph, this causes a change on the Short Run Phillips Curve.  On the above graph, first the economy starts at point A at unemployment rate1  and inflation rate1 but since the aggregate demand increased and thus led to the fall of unemployment but rise of price level it moved to point B where inflation increased to inflation rate2  and unemployment decreased  to unemployment rate1.The resulting inflation decreases purchasing power (the amount of goods or services people would be able to purchase with a dollar). Consumers with a fixed or low-income would not be able maintain their standard of living since goods would be out of their reach. Those who lend out money would be hurt by inflation because the payments they receive, would have a lesser purchasing power. However, those who borrow money would benefit since they would be paying back lenders with fewer real dollars (worth less). In order to counteract inflationary pressures, a contractionary or monetary fiscal policy could be enacted. Contractionary fiscal policy decreases aggregate demand through the reduction of government spending or increase of taxes (to decrease disposable income, for consumers, or investment ,for businesses). However it may not be a viable option since it is politically unpopular because increase in taxes makes people skeptical. Thus the economy could opt out for a contractionary monetary policy (reduces the amount of money in an economy). The Federal Reserve, who controls the supply of money of the United States, would enact this policy to decrease the money supply to increase the interest rate thus decrease aggregate demand. The forms of contractionary monetary policy include increasing the discount rate, increasing the reserve requirement, or changing open market operations. Increasing the discount rate (interest rate reserve banks charge commercial banks for short-term loans) would influence other interest rates to become higher and thus discourage lending and spending by consumers and businesses. Increasing the reserve requirement (how much banks must keep in cash) decreases the funds available in the banking system to lend to consumers and businesses. For open market operations (buying or selling of bonds), the Federal Reserve would sell bonds to take money out of the economy thus higher federal funds rate (short-term interest rate) which would stimulate less spending and lending. This policy reduces the price level but it risks a contraction of the economy as unemployment increases because it becomes more costly for businesses to maintain workers, thus less output as well.

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