The graph below shows two short-run Phillips curves: oneindicating an expected i

Question

The graph below shows two short-run Phillips curves: oneindicating an expected inflation rate of 0% (labeled SRPC0) and oneindicating an expected inflation rate of 1% (labeled SRPC1) and along-run Phillips curve (labeled LRPC). Points A, B, C, and D arefor your reference. Assume initially that the economy is inlong-run macroeconomic equilibrium and expects no inflation(represented by point A).

7.1.   Suppose that the economy moves from Ato B due to expansionary fiscal policy. This is likely the resultof _______. A.   Aggregate output falling belowpotential output in the short run B.   Aggregate output remaining atpotential output in the short run C.   Aggregate output rising abovepotential output in the short run

Explanation / Answer

B.   Aggregate output remaining at potential output in the shortrun B.   Aggregate output remaining at potential output in the shortrun

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