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Exhibit: The Inflation-Unemployment Cycle
-(Exhibit: The Inflation-Unemployment Cycle) Because of lags in the application of expansionary policy to counter a recessionary gap, the economy may:
A) not experience any change in the price level or level of unemployment.
B) move past full employment and enter an inflationary gap situation.
C) fall into deeper recession.
D) experience a fall in the price level as illustrated by the move from point 3 to point 1.

Question

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Exhibit: The Inflation-Unemployment Cycle 
-(Exhibit: The Inflation-Unemployment Cycle) Because of lags in the application of expansionary policy to counter a recessionary gap, the economy may:
A) not experience any change in the price level or level of unemployment. 
B) move past full employment and enter an inflationary gap situation. 
C) fall into deeper recession. 
D) experience a fall in the price level as illustrated by the move from point 3 to point 1.

Quizplus · Accepted Answer

If expansionary policy is not applied in a timely manner to counter a recessionary gap, the economy may move past full employment and enter an inflationary gap situation, as illustrated by the upward shift from point 1 to point 2 in the exhibit.

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