The Impact of Money Supply and Interest Rates on Unemployment

D

The central bank would increase the money supply in an attempt to decrease unemployment. This can be accomplished by decreasing short-term rates.

To diminish unemployment, the Central Bank would attempt to influence the economy through monetary policy. Monetary policy refers to the actions taken by a central bank to manage and control the money supply and interest rates in an economy.

When the central bank wishes to diminish unemployment, it typically aims to stimulate economic activity and encourage job creation. To achieve this objective, it would implement an expansionary monetary policy. Expansionary monetary policy involves increasing the money supply and lowering short-term interest rates.

The correct answer is option E: increase, increasing.

Explanation:

1. Increase the money supply: When the central bank increases the money supply, it injects more money into the economy. This can be done through various mechanisms, such as buying government bonds from banks or implementing open market operations. By increasing the money supply, the central bank aims to make more funds available for lending and investment, thereby stimulating economic growth and job creation.

2. Increase short-term interest rates: The central bank also decreases short-term interest rates as part of its expansionary monetary policy. Lowering interest rates encourages borrowing and investment by making it cheaper for individuals and businesses to access credit. This can lead to increased spending, investment, and economic activity, which can help reduce unemployment.

Therefore, the correct answer is option E: increase, increasing. The central bank would attempt to increase the money supply and decrease short-term interest rates to diminish unemployment and stimulate economic growth.