Question

Suppose an economy is operating with an inflationary gap. In this case, policymakers would seek to move the economyA) back down the Phillips curve, trading a reduction in unemployment for an increase in inflation.B) up the Phillips curve, trading a reduction in unemployment for an increase in inflation.C) back down the Phillips curve, trading a reduction in inflation for an increase in unemployment.D) up the Phillips curve, trading a reduction in inflation for an increase in unemployment.

Answer 1

A. back down the Phillips curve toward an unemployment rate that is closer to the natural rate of unemployment.

Step-by-step explanation:

In the economy, the inflationary gap describes the difference between current GDP with the amount of GDP that the country expected to be.

When the economy is operating on the inflationary gap, a country will expect that the demand for goods and services increases but it's not followed by an increase in factors of production to match it. Because of this, the unemployment rate would be expected to move down to the natural rate of unemployment.