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.

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Definitions:

Economics of Information

A study within economics that analyzes how information affects an economy and economic decisions.

Rational Assessment

The evaluation of situations or solving problems based on logic and reasoning, often involving critical thinking and analysis.

Hyperopia

In marketing, refers to a consumer's tendency to prioritize long-term benefits over immediate gratification, opposite of myopia. In vision, it is farsightedness.

Habitual Decision Making

The process of making choices that are consistent and routine, often without much thought, typically based on past behaviors and patterns.