Suppose that an economy is experiencing an expansionary gap.And suppose the economy is adjusting to potential GDP through a rising price level and a falling output level.Which of the following best illustrates how the adjustment of GDP is being achieved?
A) An active approach to correcting a recessionary gap is being used.
B) An active approach to correcting an expansionary gap is being used.
C) A passive approach to correcting a recessionary gap is being used.
D) A passive approach to correcting an expansionary gap is being used.

Question

Suppose that an economy is experiencing an expansionary gap.And suppose the economy is adjusting to potential GDP through a rising price level and a falling output level.Which of the following best illustrates how the adjustment of GDP is being achieved?  
A) An active approach to correcting a recessionary gap is being used. 
B) An active approach to correcting an expansionary gap is being used. 
C) A passive approach to correcting a recessionary gap is being used. 
D) A passive approach to correcting an expansionary gap is being used.

Quizplus · Accepted Answer

When an economy experiences an expansionary gap, it means that the actual output is higher than the potential output, indicating an economic boom. To adjust to potential GDP, the economy will need to decrease output and increase prices. This adjustment process happens passively, with no intervention from the government or the central bank. Therefore, the correct choice is D - a passive approach to correcting an expansionary gap is being used.

Suppose That an Economy Is Experiencing an Expansionary Gap