Assume that aggregate demand intersects the aggregate supply curve in the upper region of the classical range. Which of the following must be true?
I. This economy is in recession.
II. There is inflation.
III. Cyclical unemployment exists.
IV. Stagflation exists.
A. I only
B. II only
C. I and III
D. IV only
E. I, II, and IV
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Correct Answer: B, II only. This question assumes a three-segmented aggregate supply curve. If AD is high up in the vertical range of the AS curve, then this economy is facing inflation.