If potential output for an economy equals $8 billion and actual output equals $7 billion, then this economy's output gap should be expressed as:
A)−$1 billion.
B)$1 billion.
C)12.5 percent.
D)−12.5 percent.

Question

Quizplus · Accepted Answer

An output gap is measured relative to potential output and it is calculated according to the formula [(Y − Y*)/ Y*] × 100. In this case, the output gap is [($7 billion − $8 billion)/ $8 billion] × 100 = −12.5 percent.

If Potential Output for an Economy Equals $8 Billion and Actual