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.

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Definitions:

Break-even Price

The price at which total costs and total revenue are equal, resulting in no net gain or loss.

Costing

The process of determining the cost associated with producing or providing a product or service.

Mark-up

The variance between the price at which a good or service is purchased and its retail price, shown as a proportion of the purchase cost.

Selling Price

The amount of money for which something is sold, not necessarily equal to its cost to produce.