Suppose the Economy Is Currently Operating at Potential Output; a Recessionary

question 77

Multiple Choice

Suppose the economy is currently operating at potential output; a recessionary gap may be caused by each of the following except:

• A)a negative demand shock.
• B)a negative inflation shock.
• C)a decrease in government spending.
• D)a decrease in the inflation rate.

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Definitions:

Real Rate of Interest

The rate of interest an investor expects to receive after allowing for inflation, distinguishing from the nominal rate of interest, which does not account for inflation.

Deflation

A decrease in the general price level of goods and services in an economy over a period.

CPI

The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care.

Base Year

A specific year against which economic growth, prices, or other economic indicators are measured and compared.