Exhibit 16.1

-Refer to Exhibit 16.1, which shows the relationship between an economy's potential output, price level, and real GDP. According to those who favor a passive approach to policy, the economy will attain equilibrium at potential output when _____

Question

Exhibit 16.1
 
-Refer to Exhibit 16.1, which shows the relationship between an economy's potential output, price level, and real GDP. According to those who favor a passive approach to policy, the economy will attain equilibrium at potential output when _____

Quizplus · Accepted Answer

According to those who favor a passive approach to policy, the economy will attain equilibrium at potential output when the short-run aggregate supply curve shifts to the right due to a fall in real wages. They argue that any attempts to actively shift the aggregate demand curve through government spending or monetary policy will only lead to inflation without any sustainable increase in real GDP. Therefore, they prefer to let the market adjust on its own through changes in relative prices and wages.

Exhibit 16.1 -Refer to Exhibit 16.1, Which Shows the Relationship Between an the Relationship