If Policymakers Expand Aggregate Demand, What Happens to Inflation and Unemployment

question 141

Multiple Choice

If policymakers expand aggregate demand, what happens to inflation and unemployment in the long run?

• A) Inflation will be higher and unemployment will be lower.
• B) Inflation will be higher and unemployment will be unchanged.
• C) Inflation and unemployment will be unchanged.
• D) Both inflation and unemployment will be higher.

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Definitions:

Taxes

Mandatory monetary fees or different forms of taxes levied on a taxpayer by a government entity to finance government operations and a range of public expenses.

Permanent Tax

A concept in fiscal policy describing taxes that are intended to be implemented indefinitely or without a predetermined end date.

Aggregate Demand

The total market demand for goods and services within an economy at a fixed price level over a certain time period.

Crowding-Out Effect

The offset in aggregate demand that results when expansionary fiscal policy raises the interest rate and thereby reduces investment spending.