It Is Frequently Difficult to Separate Supply-Side from Demand-Side Inflation

question 51

Multiple Choice

It is frequently difficult to separate supply-side from demand-side inflation because

• A) they are ultimately caused by the same forces.
• B) resource price increases may be responsible for the initial price level increase, but further price level increases result from the Fed's efforts to reduce the resulting unemployment.
• C) in cases where there is too much aggregate spending, the economy has excess capacity and therefore has a horizontal aggregate supply curve.
• D) both kinds of inflation lead to a rapidly increasing total real output.
• E) the resulting price level effects of each offset one another.

Understand the concept and implications of short-run and long-run aggregate supply curves.

Comprehend how wage rates and resource prices affect unemployment types and aggregate supply.

Differentiate between types of unemployment and their relation to the economy's potential output.

Analyze the impact of supply shocks on the aggregate supply curve.

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Definitions:

Flexible Budget

A budget that adjusts or scales according to the volume of activity, providing a more useful tool for performance evaluation.

Direct Labor

Labor costs that are easily traced to or directly associated with specific products or services.

Direct Materials

Raw materials that are directly traceable to the manufacturing of a specific product.

Fixed Costs

Expenses that do not change with the level of production or sales, such as rent, salaries, and loan payments.