Question

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

Answer 1

a negative inflation shock.

Step-by-step explanation:

Suppose the economy is currently operating at potential output; an expansionary gap may be caused by a positive demand shock, a decrease in taxes, an increase in the money supply except a negative inflation shock.

A negative inflation shock which is a decrease in the general price level of goods and services, usually results in an increase in the inflation rate, thereby causing a recessionary gap.