Refer to the information provided in Figure 29.1 below to answer the question(s) that follow. Figure 29.1
-Refer to Figure 29.1. If the condition of the economy at Point H is realized by policy makers when the economy is at Point I, policy is likely to be inappropriate due to
A) crowding out.
B) the implementation lag.
C) the recognition lag.
D) the response lag.

Question

Refer to the information provided in Figure 29.1 below to answer the question(s) that follow.  Figure 29.1
-Refer to Figure 29.1. If the condition of the economy at Point H is realized by policy makers when the economy is at Point I, policy is likely to be inappropriate due to
A) crowding out. 
B) the implementation lag. 
C) the recognition lag. 
D) the response lag.

Quizplus · Accepted Answer

The graph shows that at Point H, there is a recessionary gap (output is below potential). However, policy makers may not immediately recognize this condition and may only realize it when the economy is at Point I (the recognition lag). This delay in recognizing the condition of the economy may result in inappropriate policy being implemented, as policy actions take time to have an effect (response lag) and may also be hindered by crowding out.

Refer to the Information Provided in Figure 29