The Long-Run Self-Correcting Mechanism That Eliminates Recessionary and Expansionary Output

question 78

Multiple Choice

The long-run self-correcting mechanism that eliminates recessionary and expansionary output gaps in the economy assumes

• A) only that the growth in wages and production costs adjusts over time.
• B) only that the inflation rate adjusts over time.
• C) only that the central bank adjusts the real interest rate over time in response to changes in the inflation rate.
• D) only that aggregate demand and actual output (Y)adjust towards potential output (Y*)over time.
• E) that the growth in wages and production costs,the inflation rate,the real interest rate,and aggregate demand and output all adjust over timE.

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