The output gap shows the deviation of actual output from potential output and it
A)may be either positive or negative
B)will always be positive
C)increases as the unemployment rate decreases
D)becomes negative if the labor force grows faster than actual output
E)increases if inflation increases

Question

Quizplus · Accepted Answer

The output gap can be either positive or negative, depending on whether actual output is above or below potential output. Therefore, option A is the correct answer. Option B and E are incorrect because the output gap can be negative as well as positive, and changes in inflation do not necessarily affect the output gap. Option C is incorrect because the output gap tends to decrease as unemployment decreases, as more resources become fully utilized, while Option D is incorrect because a faster-growing labor force could cause the potential output to increase, which would decrease the output gap.

The Output Gap Shows the Deviation of Actual Output from Potential