If we observe an economy adjusting to potential GDP as prices fall and real output increases,
A)it was experiencing an expansionary gap
B)the correction involves a shift of the AD curve
C)it was experiencing a contractionary gap
D)self-correction is not the process that is occurring
E)there are widespread labor shortages

Question

Quizplus · Accepted Answer

A contractionary gap occurs when the actual GDP is less than potential GDP, leading to a decrease in prices and eventual increase in real output. The adjustment in prices and output occurs without the need for government intervention or policy changes. This process involves a shift in the SRAS curve, not the AD curve. There may not necessarily be widespread labor shortages during this process.

If We Observe an Economy Adjusting to Potential GDP as Prices