Suppose the economy has been experiencing zero inflation and five percent unemployment for several years. The government decides to lower the unemployment percentage by generating some inflation. You need to do the following:

I personally would do nothing.

Do total profits (A) decrease, (B) increase, or (C) stay the same when new technology reduces average

total costs (shifts ATC downward in Figure 26.2 ) in
(a) An unregulated natural monopoly?
(b) A price-regulated natural monopoly?
(c) A profit-regulated natural monopoly?

To generate some inflation in order to lower the unemployment rate, the government can implement expansionary monetary and fiscal policies. Here's what you need to do:

1. Expansionary Monetary Policy: The government can direct the central bank to implement expansionary monetary policy. This involves reducing interest rates, which encourages borrowing and investment, ultimately increasing consumer spending and business activities. The central bank achieves this by conducting open market operations, lowering reserve requirements, and engaging in quantitative easing to increase the money supply.

2. Expansionary Fiscal Policy: The government can also implement expansionary fiscal policies. This involves increasing government spending and/or reducing taxes to stimulate aggregate demand in the economy. When the government spends more or reduces taxes, households and businesses have more money to spend and invest, leading to increased demand for goods and services.

3. Resulting Inflation: By implementing these expansionary policies, the increased money supply and higher demand should result in inflationary pressures over time. As businesses experience higher demand, they may raise prices to maximize profits. Inflation refers to the sustained increase in the general price level of goods and services in an economy.

4. Lowering Unemployment: Generating inflation can help lower unemployment by stimulating economic growth and increasing demand for goods and services. As businesses expand to meet the increased demand, they will likely hire more workers, leading to a decrease in the unemployment rate. This occurs because the increased demand requires additional labor inputs to produce the desired output.

5. Monitoring and Adjusting: It's crucial to closely monitor the effects of these policies on the economy. If inflation rises too quickly or becomes uncontrollable, the government may need to consider implementing contractionary policies to cool down the economy. These policies might include raising interest rates or reducing government spending to counteract inflationary pressures while keeping unemployment in check.

Remember, the effectiveness of these policies can be influenced by various factors such as the degree of spare capacity in the economy, expectations of inflation, and the financial health of businesses and households. It is important to study and analyze these factors to ensure the implementation of effective policies.