If we observe an economy adjusting to potential GDP as prices fall and real output increases,
A)it was experiencing an expansionary gap
B)the correction involves a shift of the AD curve
C)it was experiencing a recessionary gap
D)self-correction is not the process that is occurring
E)there are widespread labor shortages

Question

Quizplus · Accepted Answer

The economy is experiencing a recessionary gap, as evidenced by the falling prices and increasing real output. This means that the economy is producing less than its potential GDP, and is undergoing a self-correction process to return to potential GDP. There are no indications of labor shortages in this scenario. The correction involves a shift of the AD curve, as lower prices increase consumer purchasing power and businesses increase production to meet demand.

If We Observe an Economy Adjusting to Potential GDP as Prices