Suppose That Real GDP Has Been Above Potential GDP for Some

question 35

Essay

Suppose that real GDP has been above potential GDP for some period of time. The government is considering a reduction in spending, and the Federal Reserve is trying to determine what is likely to happen to inflation. Trace out two possible scenarios that could occur as a result of decreased government spending. Be sure to comment on the long-run inflation level in each case.

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Definitions:

Physiological

Relating to the normal functioning of living organisms and their parts, including all physical and chemical processes.

Maladaptive

Behaviors or actions that are counterproductive to an individual's well-being or ability to meet their needs or goals.

Constructive Coping

Strategies or mechanisms that individuals use to handle stress, manage their emotions, and solve problems effectively and healthily.

Retail Therapy

The act of shopping as a way to improve mood or relieve stress.