If potential output equals 4,000 and short-run equilibrium output equals 3,500, there is a(n) ______ gap and the Bank of Canada, according to an interest rate rule, will _____ real interest rates in order to close the gap.

Question

Quizplus · Accepted Answer

When potential output exceeds short-run equilibrium output, it indicates a recessionary gap. To stimulate the economy and close this gap, the Bank of Canada would lower real interest rates to encourage borrowing and investment.

If Potential Output Equals 4,000 and Short-Run Equilibrium Output Equals