Suppose an Economy Is Operating with an Inflationary Gap

question 39

Multiple Choice

Suppose an economy is operating with an inflationary gap. In this case, policymakers would
Seek to move the economy

• A) back down the Phillips curve, trading a reduction in unemployment for an increase in inflation.
• B) up the Phillips curve, trading a reduction in unemployment for an increase in inflation.
• C) back down the Phillips curve, trading a reduction in inflation for an increase in unemployment.
• D) up the Phillips curve, trading a reduction in inflation for an increase in unemployment.

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Definitions:

Earnings Decrease

A reduction in the income a company generates from its activities, excluding extraordinary and non-recurring items.

Risk

The potential for experiencing losses or less-than-expected returns, inherent in investments and business activities.

Common-sized Financial Statements

Financial statements that present all items in percentage terms. The balance sheet items are presented as a percentage of assets, and income statement items are presented as a percentage of sales.

Industry Averages

Statistical benchmarks that represent the standard or average performance in a particular industry, useful for comparison and analysis.