Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Inflation will rise due to increased demand for goods and services, causing the short-run Phillips curve to shift right.
B
Unemployment will continue to decline indefinitely, leading to a permanent increase in economic growth.
C
Inflation will remain stable as the economy adjusts without changing the employment levels.
D
The economy will revert to its natural rate of unemployment without any inflationary pressure.
Understanding the Answer
Let's break down why this is correct
Answer
When a country experiences a sudden increase in consumer demand due to a government stimulus package, more people start buying goods and services. This higher demand leads to businesses needing to produce more, which often means hiring more workers. As a result, the unemployment rate drops below its natural level, indicating that many people who wanted jobs are now employed. However, with more people working and spending, there is a risk that prices will start to rise, leading to inflation. For example, if a bakery suddenly hires more workers to meet the increased demand for bread, it might raise its prices to cover higher production costs, contributing to overall inflation in the economy.
Detailed Explanation
When demand for goods and services goes up, prices tend to rise. Other options are incorrect because Some might think that unemployment will keep going down forever; It's a common belief that prices won't change if employment goes up.
Key Concepts
Inflationary Gaps
Phillips Curve
Unemployment
Topic
Inflationary Gaps and Unemployment
Difficulty
hard level question
Cognitive Level
understand
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