📚 Learning Guide
Inflationary Gaps and Unemployment
hard

A country is experiencing a sudden increase in consumer demand due to a government stimulus package. As a result, the unemployment rate drops below the natural rate of unemployment. In the short term, what is the most likely economic outcome related to inflation and employment, considering the principles of inflationary gaps?

Master this concept with our detailed explanation and step-by-step learning approach

Learning Path
Learning Path

Question & Answer
1
Understand Question
2
Review Options
3
Learn Explanation
4
Explore Topic

Choose 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

Ready to Master More Topics?

Join thousands of students using Seekh's interactive learning platform to excel in their studies with personalized practice and detailed explanations.