Suppose that GDP is ________ potential output. We would expect prices to fall, money demand to fall, interest rates to fall, and total demand to ________.
A) above; rise
B) above; fall
C) below; rise
D) below; fall

Question

Quizplus · Accepted Answer

When GDP is below potential output, it indicates an economy is not operating at its full capacity, leading to downward pressure on prices (deflationary pressures) and a decrease in money demand as there's less economic activity requiring transactions. Lower money demand typically leads to lower interest rates as there's less competition for borrowing funds. With lower interest rates, borrowing becomes cheaper, encouraging investment and consumption, which in turn increases total demand.

Suppose That GDP Is ________ Potential Output