Suppose an economy exhibits a large unexpected increase in productivity growth that lasts for a decade.However,monetary policymakers are slow to recognize that the change is to potential,not current,output,and interpret the increase in output as a boom that leads current to exceed potential output.In this scenario,policymakers believe that __________ pressures are building and incorrectly respond by __________ interest rates,sending the economy into a(n)__________ gap.
A)inflationary;raising;recessionary
B)inflationary;reducing;recessionary
C)recessionary;raising;expansionary
D)recessionary;reducing;recessionary
E)Not enough information is given.

Question

Quizplus · Accepted Answer

The correct answer is A because an unexpected increase in productivity growth will lead to an increase in potential output. However, if monetary policymakers interpret this increase as a boom that leads current to exceed potential output, they will believe that inflationary pressures are building and will incorrectly respond by raising interest rates, sending the economy into a recessionary gap.

Suppose an Economy Exhibits a Large Unexpected Increase in Productivity