An economy with an expansionary gap will, in the absence of stabilization policy, eventually experience a(n)________ in the inflation rate, leading to a(n)________ in output.
A)increase; increase
B)increase; decrease
C)decrease; increase
D)decrease; decrease

Question

Quizplus · Accepted Answer

An economy with an expansionary gap sees the bidding up of wages and production costs. This causes an upward shift in SRAS which results in higher inflation and decreased output.

An Economy with an Expansionary Gap Will, in the Absence