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

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BlackTom AI · Accepted Answer

Examining the given macroeconomic changes helps identify the likely cause behind multiple simultaneous economic moves.
Option a: 'A decrease in aggregate demand occurred' would typically lead to higher unemployment and slower growth, and usually lower inflation or deflation. Since the scenario shows falling unemployment and rising growth, this option is inconsistent with what AD decline would produce.
Option b: 'An increase in aggregate supply occurred' tends to lower the price level or keep inflation subdued while raising real output and reducing unemployment. However, in this scenario inflation is increasing, not decreasing, which clashes with an AS expansion being the primary driver.
Option c: 'An increase in aggregate demand occurred' is consistent with all three observed changes: higher GDP growth, the unemployment rate falling (more output and jobs), and higher inflation (demand-pull pressure pushing up prices). This option aligns with the standard AD-AS framework where an AD shift to the right raises output and prices and lowers unemployment in the short run.
Option d: 'A decrease in aggregate supply occurred' would typically raise price levels (stagflation-like with higher inflation) and reduce real output and potentially raise unemployment, which does not match the inferred improvement in unemployment and growth described here. The presence of rising inflation could occur with a negative supply shock, but the concurrent rise in output and fall in unemployment makes a shift in aggregate supply alone an unlikely best explanation.
Putting the pieces together, the combination of lower unemployment, higher growth, and higher inflation most naturally points to an increase in aggregate demand accelerating the economy in the short run, rather than changes in supply alone or a decrease in demand.

MUF0062 Economics Unit 2 - Semester 1, 2025 Revision Quiz - Aggregate Supply and Macroeconomic Equilibrium (10 - 15 minutes)

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

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