Starting from potential output, if firms become less optimistic about the future and decide to decrease their investment in new capital, then this will generate a(n)________ gap and inflation will ________.
A)recessionary; increase
B)recessionary; decrease
C)expansionary; decrease
D)expansionary; increase

Question

Quizplus · Accepted Answer

When firms become less optimistic about the future and decrease investment in new capital, the AD curve shifts leftward. This generates a recessionary gap and inflation will decrease.

Starting from Potential Output, If Firms Become Less Optimistic About