HELP! Pick one answer..?
a. the aggregate demand curve always shifts back to its baseline position
b. potential GDP declines as the rate of inflation increases.
c. the Fed doesn't allow such a tradeoff.
d. unemployment always returns the natural rate.
e. inflation always returns to the baseline level
Answer:
D
Put the Price level on the Y axis
Put Quantity of Labor on x
In the middle of x draw a line perpendicular to x.
This is the natural rate of unemployment.
Equilibrium of Aggregate Demand and Supply will cross on the Natural rate line.
Now shift supply to the left. This is the supply of labor. Draw a line down to x from the new equilibrium. Observe the quantity supplied. Now draw another line in between the two equilibriums and observe the Qs. This does the same on the other side of the original equilibrium and it represents the fluctuations of unemployment.
After all this blah blah blah pick D.
I think it's B, but I couldn't be sure.
I have an exam on this sh!t Wednesday, so good question ^_^
d. unemployment always returns the natural rate.
98% sure
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