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:

Preference Shares

Shares that give holders preferential treatment over common stock in dividend payments and upon liquidation, but usually do not have voting rights.

Cumulative Dividends

Dividend payments that must be paid out to preferred shareholders before any dividends can be issued to common shareholders.

Consolidated Balance Sheet

A balance sheet that provides a financial snapshot of a parent company and its subsidiaries as one single entity, consolidating all assets, liabilities, and equity.

Equipment

Tangible property used in the operation of a business that is not intended for sale in the ordinary course of business.