Suppose the Economy Is Initially Operating at Its Potential GDP

question 2

Multiple Choice

Suppose the economy is initially operating at its potential GDP. In the Keynesian view, which two of the following will occur after the economy is hit by an adverse aggregate demand shock?

• A) Output and employment will increase, as will inflationary pressures
• B) The economy will take a long time to revert to its former state
• C) Both output and employment will fall
• D) The economy will not be affected and will remain at its potential GDP

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Definitions:

Creditors

Individuals or institutions that lend money or extend credit to others.

Operating Cash Flow

Cash generated by a company's normal business operations, indicating whether a company can maintain and grow its operations.

Fixed Assets

Physical assets with a long lifespan that serve operational purposes in a business and aren't likely to be sold or used up within a year.

Stockholders

Individuals or entities that own shares in a corporation, thus holding partial ownership of the company.