Refer to the accompanying figure. Based on the Keynesian cross diagram, at short-run equilibrium output,
A)there is a recessionary gap.
B)there is an expansionary gap.
C)output equals potential output.
D)firms will be producing more than they can sell.

Question

Refer to the accompanying figure.  Based on the Keynesian cross diagram, at short-run equilibrium output,
A)there is a recessionary gap. 
B)there is an expansionary gap. 
C)output equals potential output. 
D)firms will be producing more than they can sell.

Quizplus · Accepted Answer

Short-run equilibrium output occurs where PAE crosses the 45-degree line, at output level 4,000. Since potential output (Y*)is 3,000, there is an expansionary gap.

Refer to the Accompanying Figure