Figure 16-3

question 12

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. What happens if
Policymakers undertake expansionary policies in period 1?

• A) Aggregate demand in period 2 shifts to AD₂ and the new combination of inflation and unemployment rates for period 2 is given by point G.
• B) Aggregate demand shifts until point c in panel (a) is reached and the unemployment rate for period 2 is the natural rate.
• C) Aggregate demand in period 2 shifts to AD₂ and the new combination of inflation and unemployment rates for period 2 is given by point H.
• D) Aggregate demand in period 2 shifts to AD₃ and the new combination of inflation and unemployment rates for period 2 is given by point H.

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Definitions:

Assumptions

Premises or beliefs taken as true without empirical evidence, often serving as foundational concepts in theoretical models or experiments.

Glacial Periods

Glacial periods, also known as ice ages, are intervals of time in Earth's history when large ice sheets covered significant portions of the Earth's surface.

Climate Model

A complex computerized simulation used to predict future climate conditions based on various environmental and human factors.

Mean Surface Temperature

The average temperature of the surface of a planet or celestial body, which in Earth's case is significantly influenced by atmospheric composition and activities such as the greenhouse effect.