If a shock results in a positive output gap and the government's policy choice is to do nothing,

Question

Quizplus · Accepted Answer

A positive output gap means that the economy is producing more than its potential. In this scenario, if the government does nothing, then the price level will fall and the interest rate will fall due to the excess supply of goods and services in the market, causing demand to rise and output to increase, thereby closing the output gap. This is known as the self-correcting mechanism of the economy. Therefore, choice B is the most appropriate option.

If a Shock Results in a Positive Output Gap and the Government's