Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Increased consumer demand leads to businesses hiring more workers, reducing unemployment below the natural rate.
B
The government is implementing austerity measures to decrease public spending, resulting in higher unemployment.
C
Technological advancements are causing workers to be laid off, leading to an increase in the natural rate of unemployment.
D
A sudden increase in oil prices leads to a cost-push inflation, raising prices while maintaining the natural rate of unemployment.
Understanding the Answer
Let's break down why this is correct
Answer
An inflationary gap occurs when a country's economy is producing more goods and services than it can sustain, leading to increased demand that drives up prices. In this situation, businesses may hire more workers to meet the high demand, which lowers unemployment. However, as more people have jobs and money to spend, they start to expect prices to rise even more in the future, leading to higher inflation expectations. For example, if a bakery is selling twice as many loaves of bread as usual, it may hire extra bakers, but if customers believe that bread prices will keep increasing, they may rush to buy more now, pushing prices even higher. This cycle shows how inflation and unemployment can be interconnected during an inflationary gap.
Detailed Explanation
When people buy more, businesses need to hire more workers. Other options are incorrect because This option suggests cutting spending raises unemployment; This choice implies technology is causing job losses, which raises unemployment.
Key Concepts
Inflationary gaps
Unemployment dynamics
Phillips curve
Topic
Inflationary Gaps and Unemployment
Difficulty
hard level question
Cognitive Level
understand
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