The Long-Run Self-Correcting Mechanism That Eliminates an Expansionary Output Gap

question 53

Multiple Choice

The long-run self-correcting mechanism that eliminates an expansionary output gap (Y > Y*) in the economy assumes that

• A) the growth in wages and production costs speed up over time.
• B) the inflation rate decreases over time.
• C) the central bank lowers the nominal interest rate by more than the fall in the inflation rate,so that the real interest rate decreases over time.
• D) aggregate demand and actual output increase towards potential output over time.
• E) the growth in wages and production costs slow down over timE.

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