Suppose an economy is operating with an inflationary gap. In this case, policymakers would Jseek to move the economy
A) back down the Phillips curve toward an unemployment rate that is closer to the natural rate of unemployment.
B) up the Phillips curve toward an unemployment rate that is closer to the natural rate of unemployment.
C) back down the Phillips curve toward an unemployment rate that is further from the natural rate of unemployment.
D) up the Phillips curve toward an unemployment rate that is further from the natural rate of unemployment.

Question

Quizplus · Accepted Answer

When an economy is operating with an inflationary gap, it means that the actual unemployment rate is below its natural rate, and the output is above its potential level. Policymakers would seek to move the economy back down the Phillips curve by implementing contractionary monetary or fiscal policies, which would increase the interest rates and reduce the aggregate demand. This would lead to a decrease in prices and output, and an increase in unemployment, moving the economy closer to the natural rate of unemployment. Choice B, C, and D are incorrect because they would move the economy further away from the natural rate of unemployment.

Suppose an Economy Is Operating with an Inflationary Gap