If a shock results in a positive output gap and the government's policy choice is to do nothing,

Question

Quizplus · Accepted Answer

If the shock results in a positive output gap, it means the economy is producing more than its potential. In this scenario, if the government does nothing, the market forces will eventually reduce the output gap as the price level falls due to excess supply, leading to an increase in aggregate demand, output, and employment. This process will be facilitated by a fall in the interest rate that stimulates investment and consumption. Therefore, the correct choice is B.

If a Shock Results in a Positive Output Gap and the Government's