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 AD 1 . 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. What happens if Jpolicymakers undertake expansionary policies in period 1? A) Aggregate demand in period 2 shifts to AD₂and the new combination of inflation and unemployment rates for period 2 is given by point G. B) Aggregate demand shifts until point c in panel (a) is reached and the unemployment rate for period 2 is the natural rate. C) Aggregate demand in period 2 shifts to AD₂and the new combination of inflation and unemployment rates for period 2 is given by point H. D) Aggregate demand in period 2 shifts to AD₃and the new combination of inflation and unemployment rates for period 2 is given by point H.

Question

Quizplus · Accepted Answer

Expansionary policies increase aggregate demand, shifting it to AD2, moving the economy to point G with higher inflation and lower unemployment.