In a self-correcting model of the economy,recessionary gaps are eventually eliminated by
A) rising inflation and rising real interest rates.
B) falling inflation and falling real interest rates.
C) increasing potential output.
D) decreasing potential output.
E) government policy.

Question

Quizplus · Accepted Answer

In a self-correcting model, recessionary gaps are eliminated as falling inflation leads to lower real interest rates, which stimulates investment and consumption, eventually bringing the economy back to full employment.

In a Self-Correcting Model of the Economy,recessionary Gaps Are Eventually