If short-run equilibrium output equals 20,000 and potential output (Y*)equals 25,000, then this economy has a(n)________ gap that can be closed by ________.
A)recessionary; increasing taxes
B)expansionary; increasing transfer payments
C)expansionary; increasing government purchases
D)recessionary; increasing government purchases

Question

Quizplus · Accepted Answer

This economy has a recessionary gap because Y* exceeds short-run equilibrium output. The gap can be closed by fiscal stimulus, and increasing government purchases is one form of stimulus.

If Short-Run Equilibrium Output Equals 20,000 and Potential Output (Y*)equals