In the short-run, an output gap occurs because
A) there is insufficient demand for goods and services.
B) there is insufficient supply of goods and services.
C) wages and prices are fully flexible.
D) wages and some prices have not adjusted sufficiently to maintain output at its potential level.

Question

Quizplus · Accepted Answer

An output gap occurs in the short-run when actual output falls below the economy's potential output, which is determined by its factors of production. In this situation, there is not enough demand for goods and services to justify producing at the potential output level, leading to an overall reduction in economic activity. One possible reason for this is that wages and some prices have not adjusted enough to maintain output at its potential level, creating an imbalance in the economy that hinders growth. Thus, choice D is the best answer.

In the Short-Run, an Output Gap Occurs Because