After a financial crisis hits the country of Barbaria, which of the following is most likely to occur in the short run?

• A. The government immediately balances its budget without intervention.
• B. Unemployment rates increase as businesses reduce production.
• C. Inflation rises rapidly due to increased consumer spending.
• D. Exports surge as the domestic currency strengthens.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the context of a financial crisis. A financial crisis typically leads to a sudden loss of confidence in financial institutions, causing disruptions in credit availability and investment.
2. Step 2: Analyze the short-run effects on the economy. In the short run, businesses often face reduced demand and tighter credit conditions, which usually leads them to cut back on production.
3. Step 3: Connect reduced production to labor market outcomes. When businesses reduce production, they require fewer workers, which tends to increase unemployment rates.
4. Step 4: Evaluate the other options in the problem. Rapid inflation due to increased consumer spending is unlikely because consumer spending usually falls during a crisis. Similarly, exports surging due to a stronger domestic currency is improbable since financial crises often weaken the currency.
5. Step 5: Conclude that the most likely short-run outcome is an increase in unemployment rates as businesses reduce production, reflecting typical macroeconomic responses to financial crises.