An economy experiences a decrease in the unemployment rate, an increase in economic growth, and a decrease in the inflation rate. Which of the following is the best explanation for this?

Question

BlackTom AI · Accepted Answer

An increase in aggregate supply shifts the short-run aggregate supply (SRAS) curve rightward, raising real output and lowering the overall price level, so option d is correct.

1. Relevant knowledge points and concepts
- Aggregate supply (AS) and aggregate demand (AD) framework: rightward shifts in SRAS increase real GDP and reduce the price level; rightward shifts in AD increase GDP and the price level.
- Okun’s law: higher real GDP is associated with lower unemployment.
- Inflation is tied to the change in the price level; a falling price level or slower price growth means lower inflation.

2. Step-by-step reasoning
- Step A: Suppose SRAS increases (shifts right). For a given AD, equilibrium output (Y) rises and the equilibrium price level (P) falls (or growth in P slows).
- Step B: Higher Y → firms produce more and hire more workers → unemployment rate decreases (Okun’s law).
- Step C: Lower P or slower P growth → inflation rate decreases.
- Therefore: increase in AS → economic growth (higher Y), lower unemployment, and lower inflation — exactly the observed outcomes.

3. Intermediate “calculation” / comparative statics (conceptual)
- Initial equilibrium: (Y0, P0).
- After SRAS right shift: Y1 > Y0 and P1 < P0 (or ΔP smaller) ⇒ inflation rate (π) falls and unemployment (u) falls as Y rises.

4. Why the correct answer is correct
- Only an increase in aggregate supply can simultaneously raise output (economic growth), reduce unemployment, and reduce inflation. A rightward SRAS move produces that exact pattern.

5. Why the other options are incorrect
- a (AD increase): raises output and lowers unemployment but raises the price level → inflation would increase, not decrease.
- b (AD decrease): lowers inflation but also lowers output and raises unemployment — opposite of observed growth and unemployment change.
- c (AS decrease): reduces output and raises price level → unemployment up and inflation up, opposite of what we observe.

6. Conclusion
The described combination of lower unemployment, higher output, and lower inflation is best explained by an increase in aggregate supply; therefore the correct answer is d.

An economy experiences a decrease in the unemployment rate, an increase in economic growth, and a decrease in the inflation rate. Which of the following is the best explanation for this?单项选择题

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