If short-run equilibrium output equals 50,000 and potential output (Y*)equals 45,000, then this economy has a(n)________ gap that can be closed by ________.
A)expansionary; decreasing taxes
B)expansionary; increasing transfer payments
C)expansionary; decreasing government purchases
D)recessionary; increasing government purchases

Question

Quizplus · Accepted Answer

This economy has an expansionary gap because the short-run equilibrium output is above Y*. This gap can be closed by fiscal contraction, and decreasing government purchases is one form of contraction.

If Short-Run Equilibrium Output Equals 50,000 and Potential Output (Y*)equals