In a self-correcting model of the economy,expansionary 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 economy, expansionary gaps are eliminated as rising inflation leads to higher real interest rates, which dampens spending and investment, eventually bringing the economy back to potential output.

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