Question

Assume that the economy is in​ long-run equilibrium in Year​ 1, and that in Year 2...

Assume that the economy is in​ long-run equilibrium in Year​ 1, and that in Year 2 the normal conditions occur and that the curves shift the way they typically shift in the dynamic aggregate demand​ - aggregate supply

model.

In addition to what normally occurs in the dynamic model in Year​ 2, also assume that oil prices increase moderately. The moderate increase in oil prices in Year 2 will cause the unemployment rate to​ ________ and the inflation rate to​ _______ from what they would have been in Year 2.

A.

​increase; decrease

B.

​increase; increase

C.

​decrease; increase

D.

​decrease; decrease

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Answer #1

Ans - B) Increase; increase

Explanation:

The moderate increase in oil prices in Year 2 will cause the unemployment rate to​ increase and the inflation rate to​ increase from what they would have been in Year 2. It is so because the increase in oil prices causes the cost of production to increase which causes SRAS curve to shift leftward so as firms reduce supply of goods so the demand for labor also reduces which causes unemployment to increas also as SRAS curve shift leftward this causes inflation to increases as price level rises due to reduction in supply.

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