The country of Glassen has experienced an expansionary gap for the last three years.The advocates of passive policy are likely to suggest a policy which causes _____.
A)the short-run aggregate supply to shift to the left.
B)the short-run aggregate supply to shift to the right.
C)rising prices to shift the aggregate demand to the left.
D)wages to fall relatively quickly.
E)aggregate demand to shift to the right as wages increase.

Question

Quizplus · Accepted Answer

The advocates of passive policy believe that the economy will eventually self-correct and return to full employment without government intervention. In this case, since the country has an expansionary gap (output is above potential), the short-run aggregate supply (SRAS) curve is likely to be upward sloping and the equilibrium price level is above the expected level. To correct this, the SRAS curve needs to shift to the left, causing prices to fall and output to decrease until the economy returns to potential output. This can be achieved through policies such as reducing government spending, raising taxes, or increasing interest rates. Therefore, the best choice is A.

The Country of Glassen Has Experienced an Expansionary Gap for the Last