What happens to unemployment and real output during the market adjustment from an inflationary gap?
A)Unemployment increases and real output increases.
B)Unemployment increases and real output decreases.
C)Unemployment decreases and real output increases.
D)Unemployment decreases and real output decreases.

Question

Quizplus · Accepted Answer

During the market adjustment from an inflationary gap, the government may use contractionary monetary or fiscal policy to decrease aggregate demand and thereby reduce inflation. This decrease in aggregate demand leads to a decrease in real output and an increase in unemployment. Therefore, the correct choice is B - unemployment increases and real output decreases.

What Happens to Unemployment and Real Output During the Market