Suppose the Economy Is Initially Experiencing a Recessionary Gap

question 89

Multiple Choice

Suppose the economy is initially experiencing a recessionary gap. A reduction in the size of the budget deficit will cause which of the following in the short run?

• A) a reduction in the size of the recessionary gap and increase in real GDP.
• B) an increase in the size of the recessionary gap and decrease in real GDP.
• C) an increase in inflation and increase in aggregate supply.
• D) an inflationary gap.

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Definitions:

Value of Money

The value of money is the purchasing power of currency, which determines the amount of goods or services that can be purchased with a unit of currency.

Dollar Prices

The price of a good or service expressed in units of the U.S. dollar.

Relative Prices

The price of one good or service compared to another, typically influencing consumer choice and resource allocation.

Nominal Variables

Variables measured in monetary terms and not adjusted for inflation, representing prices or values at the time of transaction.