Figure 7-7 -Refer to Figure 7-7. Suppose the economy is initially in short-run equilibrium at K. Policy makers could either pursue a stabilization policy or allow the economy to adjust on its own. What is the difference between the two policy choices, if any? A) Both policies would return real GDP to its potential at a price level of P_j. B) Both policies would return real GDP to its potential at a price level of P_h. C) A stabilization policy would return real GDP to its potential at a price level of P_j while a nonintervention policy would return real GDP to its potential at a price level of P_h. D) A stabilization policy would return real GDP to its potential at a price level of P_h while a nonintervention policy would return real GDP to its potential at a price level of P_j.

Question

Quizplus · Accepted Answer

A stabilization policy typically aims to quickly return the economy to its potential output, often at a lower price level (P_j), while allowing the economy to adjust on its own might result in a return to potential output at a higher price level (P_h) due to inflationary pressures.

Figure 7-7 -Refer to Figure 7-7. Suppose the Economy Is Initially in Is