Suppose the economy is currently operating at potential output; a recessionary gap may be caused by each of the following except:
A)a negative demand shock.
B)a positive inflation shock.
C)an increase in taxes.
D)a decrease in the money supply.

Question

Quizplus · Accepted Answer

A positive inflation shock would typically lead to an inflationary gap, not a recessionary gap, as it increases the price level rather than reducing output.

Suppose the Economy Is Currently Operating at Potential Output; a Recessionary