Figure 16-3

question 125

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
Undertake expansionary policies in period 1, what happens if there are lags in the application
Of 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:

Plucking

A glacial process where rocks and other materials are pulled away from the earth and incorporated into the moving glacier, mainly due to the freezing of water into cracks.

Abrasion

The mechanical scraping of a rock surface by friction between rocks and moving particles during their transport by wind, glacier, waves, gravity, or running water.

Snowflakes

Ice crystals that form in clouds when water vapor freezes, creating unique patterns that fall to the ground as snow.

Interlocking Crystals

A texture in igneous rocks where the crystals are so closely fitted together that they interlock, providing strength and coherence to the rock.