Which of the following statements supports the passive approach to a contractionary gap?
A)It is likely that policies will be subject to time lags.
B)Prolonged unemployment may cause the economy's potential real GDP to fall.
C)Workers' skills may grow rusty during a prolonged recession.
D)Unemployed workers may drop out of the labor force during a prolonged recession.
E)Firms may neglect their capital stock during a prolonged recession.

Question

Quizplus · Accepted Answer

The statement "It is likely that policies will be subject to time lags" supports the passive approach to a contractionary gap, which suggests that the economy will eventually self-correct but in the meantime, policies may not have an immediate impact due to time lags. The other statements refer to potential negative consequences of a prolonged recession, which would require an active approach to offset the contractionary gap.

Which of the Following Statements Supports the Passive Approach to a Contractionary