Suppose that the economy is initially in a long- run macroeconomic equilibrium. A shock then hits the economy and we observe that the unemployment rate decreases and the price level increases. We can conclude that has increased and there is now a(n)_ gap.
A)aggregate demand; recessionary
B)aggregate supply; recessionary
C)aggregate demand; inflationary
D)aggregate supply; inflationary

Question

Quizplus · Accepted Answer

When the unemployment rate decreases and the price level increases, it is an indication of an inflationary gap. An inflationary gap occurs when the aggregate demand in the economy is exceeding the aggregate supply, leading to increases in both prices and output. As a result, choice C, which attributes the cause of the shock to aggregate demand, is the correct answer.

Suppose That the Economy Is Initially in a Long- Run