If policymakers expand aggregate demand, what happens to inflation and unemployment in the long run?
A) Inflation will be higher and unemployment will be lower.
B) Inflation will be higher and unemployment will be unchanged.
C) Inflation and unemployment will be unchanged.
D) Both inflation and unemployment will be higher.

Question

Quizplus · Accepted Answer

In the long run, according to most economic theories including the concept of the natural rate of unemployment, an expansion of aggregate demand leads to higher inflation while the unemployment rate returns to its natural rate, implying it remains unchanged from its initial state. This is because in the long run, prices and wages adjust to the higher demand, negating the temporary decrease in unemployment.

If Policymakers Expand Aggregate Demand, What Happens to Inflation and Unemployment