Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Cyclical unemployment decreases as demand increases, reducing the inflationary gap.
B
Cyclical unemployment remains constant while demand-pull inflation rises.
C
Cyclical unemployment increases as demand decreases, widening the inflationary gap.
D
Cyclical unemployment decreases and the inflationary gap narrows simultaneously.
Understanding the Answer
Let's break down why this is correct
Answer
In an economy facing demand-pull inflation, demand for goods and services is higher than what the economy can produce, leading to rising prices. During a recession, however, the economy is not performing well, and many people are out of work, which increases cyclical unemployment. In this situation, the inflationary gap, which is the difference between what the economy is producing and what it could produce at full employment, tends to be negative or less significant. For example, if a country has a potential output of 1 million goods but is only producing 800,000 during a recession, the inflationary gap is negative because people are unemployed and not contributing to production. Therefore, during a recession, cyclical unemployment rises, and the inflationary gap typically narrows, showing that demand is insufficient to push prices higher.
Detailed Explanation
When demand decreases during a recession, fewer people are needed to produce goods. Other options are incorrect because This option suggests that more demand means fewer job losses, which is not true in a recession; This choice implies that unemployment stays the same while inflation rises, which is confusing.
Key Concepts
cyclical unemployment
demand-pull inflation
recessionary gap.
Topic
Inflationary Gaps and Unemployment
Difficulty
hard level question
Cognitive Level
understand
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