Author Question: In an open economy, an increase in government spending will cause A) a reduction in domestic ... (Read 52 times)

fnuegbu · **on:** Jun 30, 2018

In an open economy, an increase in government spending will cause

A) a reduction in domestic output.
B) a reduction in imports.
C) a reduction in net exports.
D) all of the above
E) none of the above

Question 2

Based on your understanding of the Phillips curve, explain what happens to actual inflation (relative to expected inflation) when the actual unemployment rate is either above or below the natural rate of unemployment.

What will be an ideal response?

gabrielle_lawrence · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

D

Answer to Question 2

When the actual unemployment rate is equal to the natural rate of unemployment, we know that actual inflation and expected inflation must be equal. In such a case, all else fixed, inflation will not change. If the actual unemployment rate were to fall below the natural rate, inflation would increase. So, the natural rate of unemployment rate may also be referred to the non-accelerating-inflation rate of unemployment. If the opposite occurs, inflation will fall below expected.