If the Level of Current Output Suddenly Falls Below the Potential

question 101

Multiple Choice

If the level of current output suddenly falls below the potential level of output, central bankers would:

• A) lower the real interest rate.
• B) raise the real interest rate.
• C) keep the real interest rate constant and focus on only changing the nominal interest rate.
• D) attempt to shift the aggregate expenditures curve.

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Definitions:

Golden Rule

A principle denoting the optimal level of saving in an economy that results in the highest possible steady-state level of consumption.

Social Optimum

A condition in which resources are allocated in the most efficient manner, often considered in terms of welfare or utility maximization.

Market Equilibrium

The state in a market where the quantity demanded of a good matches the quantity supplied, leading to a stable price for the good.

Corrective Subsidy

A financial incentive provided by the government designed to encourage activities that yield external benefits or to correct a market failure by reducing private costs.