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:

Signal Detection Theory

A theoretical framework used to understand how decision makers differentiate between important stimuli in the presence of noise, focusing on the ability to correctly identify signals.

Absolute Threshold

The absolute threshold is the minimum intensity of stimulus that an individual can detect at least 50% of the time.

Just Noticeable Difference

The minimum level of stimulus intensity change needed to detect a difference between two stimuli.

Amplitudes

The height or strength of a wave signal, representing the magnitude of the fluctuation or displacement from a baseline.