A reduction in actual GDP down toward its potential from a demand- induced boom can be expected to be quicker
A) the more sensitive inflation is to economic conditions.
B) the more heavily recent inflationary experience is weighted in the computation of inflationary expectations.
C) the more responsive interest rates are to changes in inflation.
D) all of the above.
E) none of the above.

Question

Quizplus · Accepted Answer

All of the options provided contribute to a quicker adjustment of actual GDP towards its potential level following a demand-induced boom. A higher sensitivity of inflation to economic conditions, a heavier weighting of recent inflationary experiences in inflationary expectations, and a more responsive interest rate to changes in inflation all facilitate the economy's return to its potential output by affecting spending, saving, and investment decisions.

A Reduction in Actual GDP Down Toward Its Potential from a Demand-