Let the price adjustment coefficient in an expectations-augmented Phillips curve equal 0.2. If potential GDP in the United States were approximately
A) nothing but the transient effects of a short recession.
B) something in the neighborhood of $1 trillion in foregone GDP.
C) an increase in the unemployment rate of roughly 3.33 points.
D) slower growth as a result of investment expenditure foregone during the recession.
E) all answers but a.

Question

Quizplus · Accepted Answer

The question refers to the consequences of not achieving potential GDP, which can include significant economic costs such as foregone GDP, increased unemployment, and slower growth due to reduced investment. These outcomes are described in options B, C, and D. Option A does not align with the economic implications of the expectations-augmented Phillips curve and the concept of potential GDP.

Let the Price Adjustment Coefficient in an Expectations-Augmented Phillips Curve