Refer to the graphs, where the subscripts on the labels denote years 1 and 2. Fr
ID: 1222115 • Letter: R
Question
Refer to the graphs, where the subscripts on the labels denote years 1 and 2. From the graphs we can conclude that from year 1 to year 2:
A. the economy recovered from a recession.
B. the economy experienced economic growth and inflation.
C. output grew and the unemployment rate fell.
D. the government engaged in expansionary fiscal and monetary policies.
Refer to the graphs, where the subscripts on the labels denote years 1 and 2. From the graphs we can clearly conclude that the economy:
A. is not at full employment in either year.
B. is at full employment in year 1 but not in year 2.
C. is at full employment in year 2 but not in year 1.
D. is at full employment in both years.
Refer to the diagram and assume the economy is initially at point b1. Point c1 represents:
A. a stable position because reality and expectations are consistent.
B. a stable position because full employment and a constant annual inflation rate are represented.
C. an unstable situation because government will undertake contractionary policies.
D. an unstable situation because nominal wage rates will increase.
In the diagram:
A. any rate of inflation is consistent with the natural rate of unemployment in the long run.
B. inflation can occur, but disinflation cannot occur.
C. unemployment rates exceeding the natural rate are permanent.
D. unemployment rates less than the natural rate are permanent.
Refer to the diagram. Point b would be explained by:
A. an actual rate of inflation that exceeds the expected rate.
B. an actual rate of inflation that is less than the expected rate.
C. cost-push inflation.
D. an increase in long-run aggregate supply.
Explanation / Answer
Q1.
Long-run aggregate supply curve denotes the potential output of economy.
In year1, long-run aggregate supply curve, LR1 is vertical at output Q1. Thus, potential output of economy in year 1 was Q1.
Short-run aggregate supply curve, AS1, and aggregate demand curve, AD1 are intersecting each other corresponding to output level Q1 (potential output). Thus, equilibrium in economy is happening at potential output.
When equilibrium in economy is taking place at potential output, economy is said to be in full employment.
Thus, in year 1, economy was in full employment.
Similarly, in year2, long-run aggregate supply curve, LR2 is vertical at output Q2. Thus, potential output of economy in year 2 was Q2.
Short-run aggregate supply curve, AS2, and aggregate demand curve, AD2 are intersecting each other corresponding to output level Q2 (potential output). Thus, equilibrium in economy is happening at potential output.
When equilibrium in economy is taking place at potential output, economy is said to be in full employment.
Thus, in year 2, economy is in full employment.
However, from year 1 to year 2, long-run aggregate supply curve has shifted rightwards.
Rightward shift of long-run aggregate supply curve indicates economic growth.
Thus, from year 1 to year 2, economy has experienced the economic growth.
Equilibrium price level in year 1 is P1 (price level corresponding to intersection point of LR1, AS1, and AD1) while equilibrium price level in year 2 is P2 (price level corresponding to intersection point of LR2, AS2, and AD2).
So, price level has increased from P1 to P2 from year 1 to year 2. Increase in price level indicates inflation. Thus, economy has experienced inflation from year 1 to year 2.
Hence, the correct answer is option (C).
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