If the time taken for an economy to self-correct is shorter than the active policy lags, then _____
A) active policy will shift the short-run aggregate supply curve more than the aggregate demand curve.
B) active policy is likely to destabilize the economy.
C) time is required to accumulate evidence that the economy is performing below its potential.
D) the aggregate demand curve will shift more rapidly than the short-run aggregate supply curve.
E) active policy will work better than passive policy.

Question

Quizplus · Accepted Answer

If the time taken for an economy to self-correct is shorter than the active policy lags, it means that the economy is already on the path of self-correction before any policy can take effect. In this case, active policy may end up destabilizing the economy by shifting aggregate demand or supply more than necessary, creating inflationary or recessionary pressures. Therefore, it is best to let the economy self-correct in such situations.

If the Time Taken for an Economy to Self-Correct Is