Refer to the diagram given below.Suppose an economy is initially at point B₁. If workers fully anticipate price level increases and the government uses expansionary policies to bring the unemployment rate below 6 percent, the economy will: A)move from B₁ to C₁ at which macroeconomic policies will cease to be effective. B)remain at B₁. C)follow the path indicated by B₁, B₂, B₃, and B₄. D)directly move from B₄ to C₁.

Question

Quizplus · Accepted Answer

The economy will follow the path indicated by B₁, B₂, B₃, and B₄ if workers fully anticipate price level increases and the government uses expansionary policies to bring the unemployment rate below 6 percent. This is because the economy is initially at a point where the short-run Phillips curve (SRPC) is vertical. However, if workers fully anticipate price level increases, the SRPC becomes horizontal, which implies that the economy can achieve any level of unemployment at the anticipated price level. Expansionary policies will shift the aggregate demand (AD) curve to the right, which will increase output, lower unemployment, and increase the price level. The economy will continue to move along the horizontal SRPC until the unemployment rate falls below 6 percent, after which the economy will move along the vertical long-run Phillips curve (LRPC) toward the natural rate of unemployment at the higher price level. Therefore, the correct answer is C.

Refer to the Diagram Given Below