Consider an economy that is both in long-run and short-run equilibrium. Which of the following is likely to cause a positive output gap?
A) An increase in production costs due to an increase in oil prices.
B) A substantial increase in interest rates.
C) Implementation of new technology that increases productivity of existing workers.
D) Introduction of higher income tax rates.

Question

Quizplus · Accepted Answer

A positive output gap occurs when actual output is greater than potential output. Implementation of new technology that increases the productivity of existing workers (C) can lead to an increase in output without an immediate increase in input costs, thus creating a positive output gap. Increases in production costs (A), higher interest rates (B), and higher income taxes (D) are more likely to reduce output or increase the cost of production, which does not lead to a positive output gap.

Consider an Economy That Is Both in Long-Run and Short-Run