Suppose That an Economy Were Initially Producing at Potential and Perfectly

question 62

Multiple Choice

Suppose that an economy were initially producing at potential and perfectly balanced inflation were then to proceed for a year without effecting relative prices. In that case, the information-based theory predicts

• A) a positive correlation between the actual/potential GDP gap and prices.
• B) a negative correlation between the actual/potential GDP gap and prices.
• C) absolutely no gap between actual and potential GDP by year's end.
• D) nothing at all because its assumption of altered relative prices is moot.
• E) that monetary policy would be much stronger than fiscal policy in moving actual GDP toward potential GDP in the short run.

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