The figure below shows the price level,real GDP,and the potential output for an economy.According to those who favor a passive approach to policy,once the expansionary gap is eliminated,the economy will end up at:

A)point A.
B)point B.
C)point C.
D)a point to the right of point A.
E)a point below C.

Question

The figure below shows the price level,real GDP,and the potential output for an economy.According to those who favor a passive approach to policy,once the expansionary gap is eliminated,the economy will end up at:

A)point A. 
B)point B. 
C)point C. 
D)a point to the right of point A. 
E)a point below C.

Quizplus · Accepted Answer

Those who favor a passive approach to policy believe that the economy will naturally return to its potential output level without intervention. In this figure, the expansionary gap is eliminated when the economy reaches point B, which is at the potential output level. Therefore, according to the passive approach, the economy will end up at point B.

The Figure Below Shows the Price Level,real GDP,and the Potential