Suppose an economy is operating with an inflationary gap. In this case, policymakers would
Seek 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 the actual output level of an economy is above its potential output level. This often leads to rising prices and inflation. To address an inflationary gap, policymakers would want to reduce aggregate demand in the economy, which can be achieved by trading a reduction in inflation (through measures such as decreasing government spending or increasing interest rates) for an increase in unemployment. This would move the economy back down the Phillips curve towards its potential output level.

Suppose an Economy Is Operating with an Inflationary Gap