The self-correcting character of the ADI-IA model implies that the central bank should
A) never use active monetary policy (i.e. ,shift the policy reaction function)to eliminate output gaps.
B) always use active monetary policy to eliminate output gaps.
C) use active monetary policy to eliminate output gaps only when the self-correcting processes of the economy work very slowly.
D) active monetary policy to eliminate output gaps only when the self-correcting processes of the economy work very rapidly.
E) active monetary policy to eliminate expansionary gaps but not recessionary gaps.

Question

Quizplus · Accepted Answer

The self-correcting character of the ADI-IA model suggests that the economy will naturally move towards equilibrium, and any shocks will eventually be absorbed. Therefore, active monetary policy to eliminate output gaps should only be used when the self-correcting processes of the economy work very slowly, i.e., when it takes a long time for the economy to return to equilibrium. In other words, the central bank should intervene with active monetary policy only when the economy's natural self-correcting processes are not sufficient to close the output gap in a reasonable time frame. Hence, option C is the best choice.

The Self-Correcting Character of the ADI-IA Model Implies That the Central