Suppose the economy is initially in a long-run macroeconomic equilibrium.A shock then hits the economy and we observe that the unemployment rate decreases and the price level increases.We can conclude that ________ has increased and there is now a(n)________ gap.
A)aggregate supply; inflationary
B)aggregate demand; recessionary
C)aggregate supply; recessionary
D)aggregate demand; inflationary

Question

Quizplus · Accepted Answer

A decrease in unemployment rate and an increase in price level suggest an increase in aggregate demand, which has put pressure on prices and led to inflation. The economy is no longer in a long-run macroeconomic equilibrium, and the output gap is now positive, indicating an inflationary gap. Option A is incorrect because an increase in aggregate supply would lead to a decrease in the price level and an increase in output. Option C is incorrect because a decrease in aggregate supply would lead to both an increase in price level and decrease in output. Option B is also incorrect because a decrease in aggregate demand would lead to a decrease in real output and an increase in unemployment, resulting in a recessionary gap.

Suppose the Economy Is Initially in a Long-Run Macroeconomic Equilibrium