Chapter 16, Problem 2P

To determine

The short-run and long-run effects on the economy when the policymakers assume that the economy is overheating

Introduction:

Natural Rate of Unemployment: It is the lowest rate of unemployment an economy will reach. It is a combination of frictional and structural unemployment that persists in an efficient, expanding economy when labor and resource markets are in equilibrium.

Aggregate Demand: The amount of goods and services purchased at all possible prices at a given point of time is termed as Aggregate Demand

Aggregate Supply: The total amount of goods and services available in the economy at a particular point of time is termed as Aggregate Supply

Recessionary Gap: When the economy operates below its potential output is termed as the Recessionary Gap.