Suppose an Economy Exhibits a Large Unexpected Decrease in Productivity

question 77

Multiple Choice

Suppose an economy exhibits a large unexpected decrease in productivity growth that lasts for a decade.However,monetary policymakers are slow to recognize that the change is to potential,not current,output,and interpret the decrease in output as a recession that leads current to fall below potential output.In this scenario,policymakers believe that __________ pressures are building and incorrectly respond by __________ interest rates,sending the economy into a(n) ___________ gap.

• A)inflationary;raising;inflationary
• B)inflationary;reducing;inflationary
• C)inflationary;raising;recessionary
• D)recessionary;reducing;inflationary
• E)Not enough information is given.

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Definitions:

Price

The amount of money expected, required, or given in payment for something.

Normal Good

A normal good is a type of good for which demand increases when income increases, and falls when income decreases, holding all other factors constant.

Income

Refers to the money received, especially on a regular basis, for work or through investments.

Normal Goods

Goods for which demand increases as consumer income rises, and falls when consumer income decreases, opposite to inferior goods.