9 Suppose you knew that the NAIRU (the nonaccelerating inflation rate of rate is

Question

9 Suppose you knew that the NAIRU (the nonaccelerating inflation rate of rate is 3.5 percent. nt) was 5 percent. The current unemployment a) An increase in government spending is more likely to increase output, not prices. prices, not output. prices and output neither prices, nor output. b) Now the unemployment rate rises to 6 percent, but the NAIRU stays the same. In this case, an increase in government spending is more likely to increase prices and output. Oneither prices, nor output. output, not prices Oprices, not output.

Explanation / Answer

a. Option B.

If the economy is currently opearing below the NAIRU and output is higher than poteatil level of GDP,thus, any increase in government spending will lead to accelerated inflation in the economy without any change in output level.

b. Option C.

Since the economy is operating at above the NAIRU level and actual level of GDP is below the potential level of GDP, thus any increase in governmemt spending will increase output more likely than increase prices.

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