Figure 16-3

Multiple Choice

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 AD₁. 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 AD₂ and 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 AD₂ and the new combination of inflation and unemployment rates for period 2 is given by point H.
D) Aggregate demand in period 2 shifts to AD₃ and the new combination of inflation and unemployment rates for period 2 is given by point H.