Macro Unit 3, Question 8: Inflationary Gap and the Long Run

The video tutorial explains the concept of the long run supply curve and its significance in understanding full employment and inflationary gaps. It discusses how low unemployment can lead to inflationary pressures, causing prices and wages to rise. The tutorial also covers how the economy adjusts to a new long run equilibrium when resource prices increase, leading to a shift in the supply curve and a return to full employment.

What does the long-run aggregate supply curve represent in terms of employment?

• Economic recession

• High inflation

• Zero unemployment

• Full employment

In the business cycle, what is an inflationary gap?

• A phase of economic contraction

• A point where GDP is below full employment

• A period of high unemployment

• A situation where GDP exceeds full employment

What is a potential problem when unemployment is very low?

• Decreased consumer spending

• Increased pressure on prices and resources

• Higher interest rates

• Lower GDP

How does an economy adjust to a new long-run equilibrium when wages rise?

• The demand curve shifts to the left

• The demand curve shifts to the right

• The aggregate supply curve shifts to the left

• The aggregate supply curve shifts to the right

What happens to the price level when the aggregate supply curve shifts left?

• Price level remains constant

• Price level increases

• Price level decreases

• Price level fluctuates