If potential output equals 4,000 and short-run equilibrium output equals 3,500, there is a ________ gap and the Federal Reserve must ________ real interest rates in order to close the gap.
A)recessionary; raise
B)recessionary; reduce
C)recessionary; not change
D)expansionary; raise

Question

Quizplus · Accepted Answer

When potential output exceeds short-run equilibrium output there is a recessionary gap. The Federal Reserve must reduce interest rates to close the gap because lower rates will inspire investment and consumption spending.

If Potential Output Equals 4,000 and Short-Run Equilibrium Output Equals