Figure 33-6

-If the economy in 34-6 (b) is experiencing an inflationary gap (point g), the economy's self-correcting process will move unemployment to ____ and inflation to ____.

Question

Figure 33-6
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-If the economy in 34-6 (b) is experiencing an inflationary gap (point g), the economy's self-correcting process will move unemployment to ____ and inflation to ____.

Quizplus · Accepted Answer

In an economy experiencing an inflationary gap, the self-correcting mechanism typically involves an increase in unemployment and inflation rates. This is because, in an attempt to cool down the economy, interest rates may rise, leading to reduced investment and spending. Consequently, unemployment would increase (moving towards the natural rate), and inflation could rise further before stabilizing or decreasing, depending on monetary and fiscal policies and other economic factors. Option C reflects an increase in both unemployment and inflation, aligning with the expected outcomes of an economy self-correcting from an inflationary gap.

Figure 33-6 ​

Figure 33-6