Policy-makers' use of stabilization policy is more appropriate when the self-correcting mechanism that eventually eliminates an output gap works ________ and when the output gap is very ________.
A) rapidly;large
B) rapidly;small
C) rapidly;recent
D) slowly;large
E) slowly;small

Question

Quizplus · Accepted Answer

Stabilization policies are more appropriate when the self-correcting mechanism works slowly, meaning that the economy takes a long time to naturally return to its potential output level, and when the output gap is large, meaning that the deviation from potential output is significant. This is because the goal of stabilization policies is to close the output gap, and if the gap is already small or the self-correcting mechanism is already working rapidly, then there is a risk of overshooting and causing inflation or other unintended consequences.

Policy-Makers' Use of Stabilization Policy Is More Appropriate When the Self-Correcting