Suppose That Rising Productivity Increases Potential Output in Each Period

question 50

Multiple Choice

Suppose that rising productivity increases potential output in each period by 4%. What kind of monetary policy would be needed to maintain a zero rate of inflation at full employment?

• A) It should keep money supply constant.
• B) It should increase money supply by 4% per period.
• C) It should increase money supply by 4% in the first period and thereafter, hold money supply constant.
• D) It should decrease money supply by 4% each period.

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Definitions:

Manufacturing Overhead Applied

The allocation of estimated manufacturing overhead costs to individual units of production based on a predetermined rate.

Machine-Hours

A measure of the amount of time machines are operated, used as a basis for allocating manufacturing overhead costs in some costing systems.

Predetermined Overhead Rate

A rate used to allocate overhead costs to products or services, calculated based on estimated overhead and activity levels before the period begins.

Direct Labor-Hour

A measure of the labor time directly involved in the production of goods, usually quantified in hours.