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The government would want the economy to contract when real GDP is:
 
(i) above potential GDP and the price level is falling.
(ii) below potential GDP in the price level is falling.
(iii) above potential GDP and the price level is rising.

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Patrina Schowalter
Patrina SchowalterLv2
9 Apr 2020

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Related questions

When Actual GDP is above Potential GDP we would expect to witness:

a. A recessionary output gap.

b. Unemployment above the natural rate of unemployment.

c. Fall price levels.

d. Rising wages.

Also, could you explain more about what we would expect to witness when Actual GDP is greater Pontential GDP and when Pontential GDP is greater Actual GDP?

Why are economists concerned about inflation? 
 
(i) Inflation generally causes unemployment rates to rise.
(ii) Real GDP is necessarily falling when there is inflation.
(iii) Inflation lowers the standard of living for people whose income does not increase as fast as the price level.
(iv) Inflation increases the value of peoples' saving and encourages overspending on goods and services.

Assume the US economy is in short-run equilibrium at a real GDP below its potential real GDP. According to Keynesian theory, which of the following policies should be followed?

a. The federal government should do nothing because the economy will self-correct to potential real GDP.

b. The federal government should increase spending.

c. The Federal Reserve should decrease the money supply.

d. All of the above.

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