When aggregate demand is high enough to drive unemployment below the natural rate,
A) there is downward pressure on the price level,and the government may want to conduct contractionary fiscal policy.
B) the economy is slipping into a recession,and the government may want to conduct expansionary fiscal policy.
C) there is upward pressure on the price level,and the government may want to conduct contractionary fiscal policy.
D) there is upward pressure on the price level,and the government may want to conduct expansionary fiscal policy.
E) there is downward pressure on the price level,and the government may want to conduct expansionary fiscal policy.

Question

Quizplus · Accepted Answer

When aggregate demand is high enough to drive unemployment below the natural rate, there is upward pressure on the price level. This is because there is a shortage of workers, and firms have to compete for them by raising wages. The higher wages then lead to higher production costs, and firms pass on the higher costs to consumers in the form of higher prices. The government may want to conduct contractionary fiscal policy, such as reducing government spending or increasing taxes, to cool down the economy and reduce aggregate demand, thereby lowering the pressure on the price level.

When Aggregate Demand Is High Enough to Drive Unemployment Below