Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It leads to higher overall prices, causing firms to reduce production and lay off workers.
B
It increases consumer demand, resulting in more hiring by firms.
C
It has no impact on employment levels.
D
It encourages businesses to invest more in technology, decreasing unemployment.
Understanding the Answer
Let's break down why this is correct
Answer
A decrease in aggregate supply means that the overall production of goods and services in an economy is falling. When this happens during an inflationary gap, where demand is high but supply is low, prices start to rise quickly. Businesses may struggle to keep up with demand and might need to cut back on production or lay off workers, leading to cyclical unemployment. For example, if a factory producing toys cannot get enough materials and has to reduce its output, it may have to let some workers go, even though there are still many people wanting to buy toys. This situation shows how a drop in supply during high demand can create job losses, contributing to cyclical unemployment.
Detailed Explanation
When aggregate supply goes down, it means fewer goods are made. Other options are incorrect because Some might think that higher prices mean people buy more; It's a common belief that supply changes don't affect jobs.
Key Concepts
unemployment rate
aggregate supply
cyclical unemployment
Topic
Inflationary Gaps and Unemployment
Difficulty
hard level question
Cognitive Level
understand
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