Under wnat circunstances would it be most appropriate to engage in economic stab

Question

Under wnat circunstances would it be most appropriate to engage in economic stabilization efforts. Apply this analysis to the desire to minimize an output gap O When an economy self corrects very rapidly and when the output gap is very large. 0 when an economy self corrects very rapidly and when the output gap is very small. O When an economy self corrects very slowly and when the output gap is very small. O slowly, large When an economy self corrects very slowly and when the output gap is very large.

Explanation / Answer

Correct option is (4).

When the output gap is very large and economy slowly self corrects, government or central bank intervention is required to stabilize the economy. If output gap is negative, without such intervention, economy will be in a recession and if output gap is positive, without intervention the economy will overheat itself with upward rising inflation rate.

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