The sequence that brings an economy back toward equilibrium from a boom includes
A) an increase in inflation that works its way into expectations.
B) higher inflationary expectations that reduce aggregate demand.
C) actual GDP converging to its potential even before inflation subsides completely.
D) all of the above.
E) none of the above.

Question

Quizplus · Accepted Answer

The sequence described involves an increase in inflation during a boom, which then gets incorporated into expectations, leading to a reduction in aggregate demand. This process helps in bringing the actual GDP back to its potential level, even if inflation hasn't completely subsided, indicating that all the options A, B, and C are part of the mechanism to return the economy to equilibrium.

The Sequence That Brings an Economy Back Toward Equilibrium from a Boom