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. If policymakers Jundertake expansionary policies in period 1, what happens if there are lags in the application
Jof policy?

A) The economy may not experience any change in the price level or level of employment.
B) The economy could move past full employment to AD₃ and encounter an inflationary gap.
C) The economy could be stuck in a below full-employment equilibrium such as at point b.
D) The economy could experience deflation resulting in a movement along the Phillips phase from point G to point F.