4d) Assuming stimulus isn’t enacted, in the long run, inflation remains unchanged and output falls .

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Question restatement and options:
- The prompt presents: '4d) Assuming stimulus isn’t enacted, in the long run, inflation remains unchanged and output falls .' 
- The answer entries provided are for two dropdowns: ["falls", "rises"]. This means the completed sentence would read with the first dropdown filled as 'falls' and the second as 'rises', yielding: 'inflation falls and output rises.'

Option-by-option analysis:
- Option 1 (inflation: falls): What would cause inflation to fall in the long run if no stimulus is enacted? Typically, a lack of demand-stimulating policy reduces aggregate demand, which can ease price pressures in the short run. In the long run, however, inflation is often governed by expectations and monetary conditions; if policy is not stimulative and demand remains weaker than potential, inflation can ease or remain subdued rather than rise. Saying inflation definitively falls in the long run relies on the assumption that price/wage adjustments and expectations align to lower the price level over time. This is plausible under some models but not universally guaranteed; it contends that inflation does not remain unchanged, but moves downward. The statement also hinges on how robust the long-run neutralities are assumed to be. In short, this option is not universally true but could be argued under scenarios with persistent demand weakness and adaptive expectations.

- Option 2 (output: rises): In the long run, most classical and many modern frameworks treat output as returning to or remaining at potential (the natural level) in the absence of persistent demand shocks or supply-side improvements. If stimulus isn’t enacted, the economy is generally not expected to experience a sustained rise in real output beyond potential; rather, output is more likely to settle at its potential level. Therefore, claiming that output rises in the long run without stimulus contradicts the typical long-run equilibrium where output does not systematically exceed potential in the absence of enduring shocks. This makes the statement that output rises in the long run less plausible and likely incorrect in standard analyses.

Overall interpretation and pitfalls:
- The core confusion often lies in distinguishing short-run versus long-run effects and what dynamic model (Keynesian with demand deficiencies, or classical with flexible prices) one is applying. Without stimulus, short-run output gaps may close gradually; in the long run, if the economy returns to potential, output should not persistently rise above potential, nor should inflation be guaranteed to fall or stay unchanged—depending on expectations and monetary policy. This makes the 'falls' for inflation and 'rises' for output both questionable as universal claims in the long run without additional context about price/wage rigidity, expectations, and policy rules.

- The absence of answer options beyond the two provided makes it hard to identify a uniquely true statement. If forced to critique the paired fill ('inflation falls' & 'output rises'), one would argue that the second clause is at odds with standard long-run outcomes unless there is an accompanying supply-side improvement or persistent demand-boosting factors. Conversely, selecting 'inflation falls' as the first fill may be acceptable in some frameworks but is not a universal long-run result when prices adjust to maintain steady inflation targets.

- From a pedagogical standpoint, students should connect the long-run neutrality of money and the concept of potential output with the implications for inflation and output. In the absence of stimulus, the long-run inflation path is often tied to monetary policy expectations, while output tends toward potential, barring structural changes.

If you’re working with a specific macro model or course framing (e.g., AD-AS with sticky prices vs. classical long-run flexibility, or a particular monetary rule), these conclusions could shift. In any case, pay close attention to whether the prompt assumes price rigidities, expectations, or a particular policy regime, as that will determine which of the two dropdown fills is more defensible.

2025Fall-ECN3615-01 Practice Final Exam

4d) Assuming stimulus isn’t enacted, in the long run, inflation remains unchanged and output falls .

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2025Fall-ECN3615-01 Practice Final Exam

4d) Assuming stimulus isn’t enacted, in the long run, inflation remains unchanged and output falls .

View Explanation

Log in for full answers

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