The Long-Run Self-Correcting Mechanism That Eliminates a Recessionary Gap (Y

question 6

Multiple Choice

The long-run self-correcting mechanism that eliminates a recessionary gap (Y < Y*) in the economy requires

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

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