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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A German-born American diplomat and political scientist who served as Secretary of State and National Security Advisor under the presidential administrations of Richard Nixon and Gerald Ford.

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