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In theory, this is simple. In practice it is very difficult -- otherwise, there would never be problems with inflation or high unemployment.
Basically, to have both of these things, government is supposed to keep the supply of money at the proper level and keep taxes and spending at the proper level. (Who knows what these proper levels are...)
If there is too much unemployment, the government is supposed to spend more and tax less. It is supposed to (like the Fed announced it would do today) increase the money supply by doing things like buying government bonds.
When the rate of inflation is too high, the government is supposed to do the opposite of all of these things. Basically, it is supposed to drain money from the economy so that there will be less inflation.
This is a very basic answer to a very broad question...
In my opinion, to keep low inflation, It's better to increase production of mainly life stuffs and to decrease the cost of crucial resources such as taxes, gasoline, and else.
To maintain full employment, the goverment must create healthy business factories which have good vision and mission for future extension of employee cycle.
Level of employment and rate of inflation in an economy is the result of complicated interaction of any factors including:
- Expectations and actions taken by the people and the firms in the economy. This affects things like total production, productivity, new investments and buying behavior of people.
- Natural environmental conditions affecting the economy. For example, rainfall and other weather conditions affect the agricultural production.
- Population growth and other demographic factors.
- Actions of other economies
- Political situation of within the country and in international arena.
Government does not have direct influence on most of these factors. At the most government can influence some of these factors through its fiscal and financial policies and actions. However there is considerable amount of uncertainty associated with the actual impact of these measures. Also the measures that tend to increase demand and thus increase motivation for higher production, and in this way increase employment also tend to add to inflation. Thus a government is faced with additional tricky task of maintaining a healthy balance between level of employment and rate of inflation.
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