Based on the diagram, if potential output equals 8,000 and the real interest rate is 6 percent, then there is ________ gap and the Fed must ________ the real interest rate so that output will equal potential output.
A)a recessionary; raise
B)a recessionary; reduce
C)no output; not change
D)an expansionary; raise

Question

Based on the diagram, if potential output equals 8,000 and the real interest rate is 6 percent, then there is ________ gap and the Fed must ________ the real interest rate so that output will equal potential output.   
A)a recessionary; raise 
B)a recessionary; reduce 
C)no output; not change 
D)an expansionary; raise

Quizplus · Accepted Answer

Along the r = 6 percent expenditure line, the equilibrium output is 4,000 which results in a recessionary gap of 4,000. To close this gap, the Fed must reduce real interest rates.

Based on the Diagram, If Potential Output Equals 8,000 and the Real