Suppose an economy exhibits a large unexpected decrease 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 they interpret the decrease in output as a recession that leads current to fall below 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; inflationary
B) inflationary; reducing; inflationary
C) inflationary; raising; recessionary
D) recessionary; reducing; inflationary
E) Not enough information is given.

Question

Quizplus · Accepted Answer

Policymakers mistakenly believe there is a recessionary gap and reduce interest rates, which can lead to an inflationary gap due to increased demand.

Suppose an Economy Exhibits a Large Unexpected Decrease in Productivity