Suppose the economy is currently operating at potential output; an expansionary gap may be caused by each of the following EXCEPT:
A) a positive demand shock.
B) a negative inflation shock.
C) a decrease in taxes.
D) an increase in the money supply.

Question

Quizplus · Accepted Answer

A negative inflation shock would cause a contractionary gap, not an expansionary gap. The other three choices (A, C, and D) could cause an expansionary gap by increasing aggregate demand above potential output.

Suppose the Economy Is Currently Operating at Potential Output; an Expansionary