Multiple Choice
Every economic system must answer three fundamental questions. Which of the following is the third question?
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0. Basic Principles of Economics
Introduction to Economics
Multiple Choice
Which of the following statements about inflation is true in the short run?
A
In the short run, inflation has no effect on the unemployment rate.
B
In the short run, an increase in aggregate demand can lead to higher inflation and lower unemployment.
C
In the short run, inflation is solely caused by changes in the money supply.
D
In the short run, inflation always leads to a decrease in real GDP.
Verified step by step guidance1
Step 1: Understand the short-run relationship between inflation and unemployment, often described by the Phillips Curve, which suggests that in the short run, there is a trade-off between inflation and unemployment.
Step 2: Recognize that an increase in aggregate demand shifts the aggregate demand curve to the right, which can raise the price level (inflation) and increase output, thereby reducing unemployment temporarily.
Step 3: Note that inflation in the short run is not solely caused by changes in the money supply; other factors like demand shocks can also influence inflation.
Step 4: Understand that inflation does not always lead to a decrease in real GDP in the short run; in fact, higher inflation due to increased demand can coincide with higher real GDP.
Step 5: Conclude that the statement 'In the short run, an increase in aggregate demand can lead to higher inflation and lower unemployment' aligns with the short-run economic theory and is therefore true.
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