Question

Assume that the economy is initially at point E, with an expected and actual rate of inflation of 6% and an unemployment rate of 5%.

1.Which of the following events could lead the economy to move to point H in the short run? (Choose only one)

A- The Fed raises interest rates.

B- Net exports increase.

C- Consumption spending rises.

D- The government increases spending.

Answer 1

A rise in consumption spending could move the economy from point E to point H in the short run as it increases aggregate demand, which aligns with the Keynesian Phillips Curve tradeoff between unemployment and inflation. The correct answer is C- Consumption spending rises.

Step-by-step explanation:

The event that could lead the economy to move to point H in the short run, given an initial actual and expected inflation rate of 6% and an unemployment rate of 5%, would be option C- Consumption spending rises.

This scenario aligns with the Keynesian Phillips Curve, which illustrates a tradeoff between the unemployment rate and the inflation rate.

A rise in consumption spending would increase aggregate demand, potentially decreasing unemployment and increasing inflation in the short run, thus moving the economy from point E to point H on the Phillips Curve diagram.

It's important to note that while the Phillips Curve suggests this short-run tradeoff, theories also acknowledge adjustments over time; persistent efforts to lower unemployment below the natural rate could lead to accelerating inflation without achieving permanently lower unemployment rates.