Suppose the Economy Is Initially in Equilibrium, and Real and Potential

question 121

Multiple Choice

Suppose the economy is initially in equilibrium, and real and potential GDP are equal. Now, suppose export orders increase. Under these circumstances, which of the following statements is true?

• A)If the countercyclical fiscal policy response is made correctly, the new equilibrium will in the long run have a higher rate of inflation than if no response had been made.
• B)If the countercyclical fiscal policy response is made correctly, the new equilibrium will in the long run have a lower rate of inflation than if no response had been made.
• C)The inflation rate in the new long-run equilibrium will be the same, whether or not countercyclical fiscal policy is used.
• D)If the countercyclical fiscal policy response is implemented too late, the new long-run equilibrium will have a higher rate of inflation than if no response had been made.
• E)Countercyclical fiscal policy is unable to counter the effect of changes in export orders on real GDP.

---

Definitions:

Conditioning

A process of behavior modification by which a subject comes to associate a desired behavior with a previously unrelated stimulus.

Cognitive-behavioral

A therapeutic approach that aims to solve problems concerning dysfunctional emotions, behaviors, and cognitions through a goal-oriented, systematic procedure.

Humanistic-existential

A psychological approach focusing on individual experience, personal freedom, and the meaning of life.

Psychodynamic-gestalt

An integrative therapeutic approach combining elements from both psychodynamic therapy, which focuses on unconscious processes, and Gestalt therapy, emphasizing present moment awareness and personal responsibility.