Take a look at the IS-MP-PC model shown here. At equilibrium, the output gap is:

A)4%.
B)3%.
C)-6%.
D)-1%.

Question

Take a look at the IS-MP-PC model shown here. At equilibrium, the output gap is:

A)4%. 
B)3%. 
C)-6%. 
D)-1%.

Quizplus · Accepted Answer

In the IS-MP-PC model, the output gap is given by the difference between actual output and potential output. At equilibrium, the actual output is equal to potential output, so the output gap is zero. Looking at the diagram, we can see that at the intersection of the IS curve and the PC curve, the output gap is negative, indicating that actual output is below potential output. From the graph, we can estimate that the output gap is around -6%. Therefore, the correct choice is C.

Take a Look at the IS-MP-PC Model Shown Here