When there is a recessionary gap, inflation will ________, in response to which the Federal Reserve will ________ real interest rates, and output will ________.
A)decline; raise; decline
B)decline; lower; expand
C)decline; lower; decline
D)increase; raise; decline

Question

Quizplus · Accepted Answer

Declining inflation rates eliminate recessionary gaps because the SRAS curve shifts to downward to bring the economy back to long-term equilibrium. The Fed accommodates this shift by lowering interest rates as inflation falls according to its existing reaction function, which means that output expand to the level of potential output.

When There Is a Recessionary Gap, Inflation Will ________, in Response