Why is monetary policy important during periods of high unemployment?

Monetary policy plays a crucial role during periods of high unemployment because its primary goal is to manage economic stability and growth. When unemployment is high, central banks often use monetary policy to inject more money into the economy, which can stimulate demand for goods and services. This infusion of liquidity usually results in lower interest rates, making borrowing cheaper for businesses and consumers. As companies have more access to low-cost borrowing, they are likely to invest in expansion and hire more workers, contributing to a reduction in unemployment levels.

In contrast, while increasing taxes could boost government revenue, it generally does not address the immediate concern of high unemployment, as it may reduce disposable income for consumers and dampen economic activity. Encouraging nations to trade more can be beneficial, but it does not directly impact domestic unemployment levels in the short term. Reducing government spending often leads to cutbacks in public sector employment, which could exacerbate unemployment rather than alleviate it. Hence, utilizing monetary policy effectively to increase liquidity and lower interest rates is a key strategy to combat high unemployment.