Under Which of the Following Circumstances Would Stabilization Policy Be

question 22

Multiple Choice

Under which of the following circumstances would stabilization policy be ineffective but not counterproductive?

• A) There is a negative output gap of $60 billion, the expenditure multiplier is 3, and government increases its purchases by $20 billion
• B) There is a positive output gap of $10 billion, the expenditure multiplier is 2, and government reduces its purchases by $20 billion
• C) The implementation lag for stabilization policy is of such length that the economy corrects itself before the policy has an impact
• D) Expansionary fiscal policy crowds out investment on a dollar-for-dollar basis
• E) The inflation resulting from an adverse supply shock is misinterpreted as being the result of a demand shock

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