Figure 16-3

question 11

Multiple Choice

Figure 16-3
Panel (a) Panel (b) Suppose the level of potential output (Y_P) is $1,000 billion and the natural rate of unemployment is 5%. In Panel (a) , the aggregate demand curve in Period 1 is AD₁. Assume that the price level in Period 1 has risen by 1.5% from the previous period and the unemployment rate is 10%. Thus, in Panel (b) point F shows an initial rate of inflation of 1.5% and an unemployment rate of 10%. Similarly, point b in Panel (a) corresponds to point G in Panel (b) and point d in Panel (a) corresponds to point H in Panel (b) .
-Refer to Figure 16-3. Suppose the economy is operating at point a. If policymakers Jundertake expansionary policies in period 1, what happens if there are lags in the application
Jof policy?

• A) The economy may not experience any change in the price level or level of employment.
• B) The economy could move past full employment to AD₃ and encounter an inflationary gap.
• C) The economy could be stuck in a below full-employment equilibrium such as at point b.
• D) The economy could experience deflation resulting in a movement along the Phillips phase from point G to point F.