Suppose We Observe an Economy Adjusting to Potential GDP as Prices

question 23

Multiple Choice

Suppose we observe an economy adjusting to potential GDP as prices fall and real output increases.Which of the following describes what the economy is experiencing?  

• A) It is experiencing an expansionary gap. 
• B) It is experiencing a shift of the AD curve. 
• C) It is experiencing a recessionary gap. 
• D) It is NOT experiencing a self-correction.

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Definitions:

Direct Labor

The labor costs associated with employees who are directly involved in the manufacturing of products or provision of services.

Fixed Overhead

Refers to the regular, recurring costs associated with running a business that are not affected by production volume, including rent and insurance.

Property, Plant, and Equipment

These are long-term assets a company uses in the production of its goods and services, such as buildings, machinery, and vehicles.

Fixed Manufacturing Overhead

The set of production costs that do not change with the level of production, including salaries, rent, and insurance of the factory.