Does the figure above illustrate a recessionary or an inflationary gap? What do potential GDP and real GDP equal? What is an appropriate fiscal policy to restore real GDP to potential real GDP?
What will be an ideal response?
A recessionary gap occurs when real GDP is less than potential GDP, which is precisely what the figure illustrates. In the figure, potential GDP equals $16.5 trillion but real GDP equals only $16.0 trillion. In order to restore real GDP back to potential GDP using fiscal policy, the government could increase government expenditures on goods and services and/or decrease taxes.
You might also like to view...
Refer to Figure 11-1. The average product of the 4th worker
A) is 68. B) is 17. C) is 11. D) cannot be determined.
When the Federal Reserve increases the money supply, people ________
A) decrease their purchases of bonds and other financial assets B) may, in the short run, increase their purchases of goods and services C) decrease the quantity of money holdings D) all of the above E) none of the above
Refer to Scenario 14.2. What is the marginal revenue product of the 4th worker?
A) 20 B) 25 C) 30 D) 32.5 E) 35
When Lionel, an orange grower, hires Terry, Terry's marginal physical product per hour is 9 bushels of oranges. The price is $5 per bushel and the hourly wage rate is $55 . We know then that
a. orange growing is a profitable business b. Terry creates a division of labor that adds not only output but profit for Lionel c. the labor market is not competitive because price and the wage rate are not the same d. Lionel should not have hired Terry e. Terry's marginal revenue product is greater than the wage rate