Suppose an economy is operating with an inflationary gap. In this case, policymakers would Jseek to move the economy
A) back down the Phillips curve, trading a reduction in unemployment for an increase in inflation.
B) up the Phillips curve, trading a reduction in unemployment for an increase in inflation.
C) back down the Phillips curve, trading a reduction in inflation for an increase in unemployment.
D) up the Phillips curve, trading a reduction in inflation for an increase in unemployment.

Question

Quizplus · Accepted Answer

An inflationary gap occurs when actual output is above potential output, leading to inflation. Policymakers would want to reduce inflation, which would require moving the economy down the Phillips curve. This would involve decreasing aggregate demand, which in turn would lead to a decrease in output and an increase in unemployment. Therefore, policymakers would be trading a reduction in inflation for an increase in unemployment, as stated in answer choice C.

Suppose an Economy Is Operating with an Inflationary Gap