Suppose an Economy Exhibits a Large Unexpected Increase in Productivity

Multiple Choice

Suppose an economy exhibits a large unexpected increase in productivity growth that lasts for a decade; however, monetary policymakers are slow to recognize that the change is to potential-not current-output, and they interpret the increase in output as a boom that leads current to exceed potential output. In this scenario, policymakers believe that ________ pressures are building and incorrectly respond by ________ interest rates, sending the economy into a(n) ________ gap.

A) inflationary; raising; recessionary
B) inflationary; reducing; recessionary
C) recessionary; raising; expansionary
D) recessionary; reducing; recessionary
E) Not enough information is given.