Suppose a passive approach to policy is followed.How would an expansionary gap eventually close?
A) Restrictive fiscal policy would be used.
B) Restrictive monetary policy would be used.
C) Inflation would cure the problem because the price level in an expansionary gap is lower than firms and workers had expected.
D) Inflation would cure the problem because the price level in an expansionary gap is higher than firms and workers had expected.

Question

Suppose a passive approach to policy is followed.How would an expansionary gap eventually close?  
A) Restrictive fiscal policy would be used. 
B) Restrictive monetary policy would be used. 
C) Inflation would cure the problem because the price level in an expansionary gap is lower than firms and workers had expected. 
D) Inflation would cure the problem because the price level in an expansionary gap is higher than firms and workers had expected.

Quizplus · Accepted Answer

In an expansionary gap, the economy is operating above its potential output, leading to upward pressure on prices. Over time, as prices rise, real wages and profits adjust, eventually slowing down the economy and closing the gap. This process does not involve active fiscal or monetary interventions but rather relies on inflation and market adjustments.

Suppose a Passive Approach to Policy Is Followed