Question

Which of the following is not a generalization supported by the extended AD-AS model?

A. Typically, there is a short-run trade-off between unemployment and inflation.
B. Aggregate supply shocks can cause both unemployment and inflation rates to increase.
C. There is no significant trade-off between unemployment and inflation in the long run.
D. Government action is always needed to bring the economy to full employment.

Answer 1

The AD-AS model does not support the idea that government action is always needed for full employment; instead, it suggests that the economy self-corrects in the long run, contradicting statement D.

Step-by-step explanation:

The generalization not supported by the extended AD-AS model is D. Government action is always needed to bring the economy to full employment. stating that government action is always required for full employment, is not a generalization supported by the extended AD-AS model.

The extended Aggregate Demand-Aggregate Supply (AD-AS) model suggests several concepts: there is a short-run trade-off between unemployment and inflation (A), aggregate supply shocks can simultaneously cause unemployment and inflation (B), and there is no significant trade-off between unemployment and inflation in the long run (C), as unemployment returns to the natural rate. However, the model does not assert that government action is always necessary to achieve full employment (D).