Under Which of the Following Circumstances Would Stabilization Policy Be

Multiple Choice

Under which of the following circumstances would stabilization policy be ineffective but not counterproductive?

A) There is a negative output gap of $60 billion, the expenditure multiplier is 3, and government increases its purchases by $20 billion
B) There is a positive output gap of $10 billion, the expenditure multiplier is 2, and government reduces its purchases by $20 billion
C) The implementation lag for stabilization policy is of such length that the economy corrects itself before the policy has an impact
D) Expansionary fiscal policy crowds out investment on a dollar-for-dollar basis
E) The inflation resulting from an adverse supply shock is misinterpreted as being the result of a demand shock