ECONOMICS (CBSE/UGC NET)

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ECONOMICS

AGGREGATE DEMAND

Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
Suppose the economy is producing at the natural rate of output and the government passes legislation that severely restricts a company’s ability to reduce production costs via outsourcing. Everything else held constant, this policy action will cause ____ in the unemployment rate in the short run and ____ in inflation in the short run.
A
a decrease; an increase
B
a decrease; a decrease
C
an increase; an increase
D
no change; no change
Explanation: 

Detailed explanation-1: -If current real GDP is less than full employment output, an economy is in a recession. If current real GDP is higher than full employment output, an economy is experiencing a boom. If the current output is equal to the full employment output, then we say that the economy is in long-run equilibrium.

Detailed explanation-2: -When output falls below the economy’s full-employment output level, which of the following adjustments will occur?-The demand for labor will decrease.

Detailed explanation-3: -When an economy is temporarily operating at an output that is beyond its full-employment rate, which of the following is true? Excess demand in resource markets will lead to higher resource prices, which will increase costs and direct the economy toward full employment.

Detailed explanation-4: -The rightward shift in aggregate supply eventually causes output to rise back to the natural rate.

There is 1 question to complete.
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