If the economy experiences a supply shock associated with a decline in potential
ID: 1197795 • Letter: I
Question
If the economy experiences a supply shock associated with a decline in potential output, policymakers need to
raise the real interest rate because this creates a recessionary gap.
raise the real interest rate because this creates an inflationary gap.
lower the real interest rate because this creates a recessionary gap.
lower the real interest rate because this creates an inflationary gap.
not change the interest rate.
A.raise the real interest rate because this creates a recessionary gap.
B.raise the real interest rate because this creates an inflationary gap.
C.lower the real interest rate because this creates a recessionary gap.
D.lower the real interest rate because this creates an inflationary gap.
E.not change the interest rate.
Explanation / Answer
c) lower the real interest rate because this creates a recessionary gap.
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