Use the graph, Figure 2, below to answer questions 40-41 Figure 2 Potential outp

Question

Use the graph, Figure 2, below to answer questions 40-41 Figure 2 Potential output Price level SRAS AD Y1 Y2 Real GDP 40) According to the graph, this ecomomy's main problem is probably A) inflation B) unemployment C) low output D) stagflation At what level of output is this economy's unemployment rate most apt to natural rate? A) Y1 B) Y2 C) Y1 +Y2 D) It is impossible to tell 41) 42) What impact would you expect a natural disaster to have on the econo output (ceteris paribus)? A) It would shift to the right B) It would shift to the left C) There would be no change

Explanation / Answer

40)

Economy is operating beyond potential level. Hence, increase in demand beyond the potential level would cause only inflation.

Thus, right answer is (a)

41)

natural rate is most likely to happen when economy operate at its potential level.

Thus right answer is (A)

42)

Natural disaster will destroy the production facilities and inventories. Thus output will fall.

Right answer is (b)

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