A simultaneous increase in both unemployment and inflation would most likely be the result of a(n)
A) increase in long-run aggregate supply.
B) increase in short-run aggregate supply.
C) decrease in the aggregate demand curve.
D) increase in the long-run aggregate supply curve and an increase in the aggregate demand curve.
E) decrease in the short-run aggregate supply curve.

Question

Quizplus · Accepted Answer

An increase in unemployment suggests a decrease in production levels, which can occur due to various reasons such as a recession, decrease in capital investment or decrease in labor productivity. A decrease in production levels results in a leftward shift of the short-run aggregate supply curve which causes an increase in price levels (inflation) and a decrease in output (unemployment). Thus, an increase in both unemployment and inflation indicates a decrease in short-run aggregate supply, which is represented by option E.

A Simultaneous Increase in Both Unemployment and Inflation Would Most