Suppose? that, in the United? States, the inflation rate is at 3.2 percent? (the target inflation rate is 2? percent). Rapidly rising prices and low interest rates have spurred business to hire more workers and invest in new facilities.

Which of the following is likely to be true of the U. S. economy if there is a rapid rise in prices and low interest? rates?

A. There could be an appreciation of the U. S.? dollar, resulting in a lower output gap in the U. S. economy.

B. The U. S. economy could experience an increase in gross domestic? product, eventually resulting in an economic boom.

C. The U. S. economy could experience unsustainable? expansion, resulting in a sharp economic downturn.

Question

Ellen

Business

14 January, 21:30

Suppose? that, in the United? States, the inflation rate is at 3.2 percent? (the target inflation rate is 2? percent). Rapidly rising prices and low interest rates have spurred business to hire more workers and invest in new facilities.

Which of the following is likely to be true of the U. S. economy if there is a rapid rise in prices and low interest? rates?

A. There could be an appreciation of the U. S.? dollar, resulting in a lower output gap in the U. S. economy.

B. The U. S. economy could experience an increase in gross domestic? product, eventually resulting in an economic boom.

C. The U. S. economy could experience unsustainable? expansion, resulting in a sharp economic downturn.

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Answers (1)

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Bruce · Answer 1

The correct answer is C. The U. S. economy could experience unsustainable? expansion, resulting in a sharp economic downturn.

Explanation:

Unsustainable economic growth is a theoretical economic situation proposed by Jagdish Bhagwati in 1958, where economic growth can become so counterproductive as to leave a country in worse conditions than before.

If growth is based solely on exports, these could lead to a fall in the terms of trade of the exporting nation. In rare circumstances, this fall could be even greater than the gains generated by the growth, worsening the country's situation. This result is viable only if the growing country influences international market prices.