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

Question

Quizplus · Accepted Answer

In a passive approach, inflation would eventually close the expansionary gap because the higher-than-expected price level would lead to increased costs for firms, reducing output and closing the gap.

If a Passive Approach to Policy Was Followed,how Would an Expansionary