Suppose the economy is currently operating at potential output; a recessionary gap may be caused by each of the following EXCEPT:
A) a negative demand shock.
B) a positive inflation shock.
C) an increase in taxes.
D) a decrease in the money supply.

Question

Quizplus · Accepted Answer

A positive inflation shock would not cause a recessionary gap because it would indicate an economy operating above potential output. The other choices (A, C, and D) could potentially cause a recessionary gap by reducing aggregate demand and output below potential.

Suppose the Economy Is Currently Operating at Potential Output; a Recessionary