An important consideration for monetary policy is the extent of spare capacity in the economy. This depends on the balance of demand for goods and services relative to the economy’s potential to produce them. A shortfall of demand results in spare capacity and places downward pressure on inflation, while an excess of demand results in capacity becoming constrained, placing upward pressure on inflation. A key indicator of spare capacity in the economy is the unemployment rate. A high unemployment rate means that there is a large pool of workers willing to work but not engaged in production, suggesting that the economy ... (full story)