If a Shock Results in a Positive Output Gap and the Government's

question 40

Multiple Choice

If a shock results in a positive output gap and the government's policy choice is to do nothing,

• A) the central bank will immediately increase the money supply and close the output gap.
• B) the price level will fall, the interest rate will fall, and output will rise, closing the gap.
• C) the government will immediately implement expansionary fiscal policy.
• D) the economy will be prevented from returning to equilibrium.
• E) it will be detrimental to the economy.

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