The GDP for the nation of Economia is currently below potential output. If the adjustment to the long-run equilibrium occurs rapidly, the government of Economia is likely to pursue a policy of
A) increasing government spending to increase aggregate demand.
B) increasing the money supply to increase aggregate demand.
C) taking no action and allowing the economy to adjust naturally.
D) decreasing government spending to increase aggregate demand.

Question

Quizplus · Accepted Answer

When the adjustment to long-run equilibrium occurs rapidly, it implies that the economy is capable of self-correcting in a short period. Therefore, the government might opt for a laissez-faire approach, allowing the economy to adjust naturally without intervening through fiscal or monetary policies. This approach relies on the belief that market forces will naturally correct the output gap, bringing the economy back to its potential output.

The GDP for the Nation of Economia Is Currently Below