Suppose the average price of gasoline in Canada doubled.Accompanying the increase in gas prices was a decrease in new automobile sales.Other things equal,if this trend continued,real GDP would likely ________ and the output gap would become ________.

Question

Quizplus · Accepted Answer

The increase in gas prices would lead to a decrease in consumption spending as households have less disposable income, leading to a decrease in demand for goods and services, and hence a fall in real GDP. The decrease in new automobile sales would also decrease investment spending, further contributing to the fall in real GDP. The output gap, which is the difference between actual and potential GDP, would become more negative as the economy moves further away from its potential output due to the fall in real GDP.

Suppose the Average Price of Gasoline in Canada Doubled