What is an expansionary gap equal to?
A) real GDP minus nominal GDP
B) nominal GDP minus real GDP
C) actual short-run output minus potential output
D) the current period's nominal GDP minus the preceding period's nominal GDP

Question

What is an expansionary gap equal to?  
A) real GDP minus nominal GDP 
B) nominal GDP minus real GDP 
C) actual short-run output minus potential output 
D) the current period's nominal GDP minus the preceding period's nominal GDP

Quizplus · Accepted Answer

An expansionary gap is equal to actual short-run output minus potential output. This gap indicates that the economy is producing above its potential output and this can lead to inflationary pressures in the long run. Option A is incorrect because real GDP is adjusted for inflation, whereas nominal GDP is not. Option B is the reverse calculation of option A and therefore incorrect. Option D is related to the concept of nominal GDP growth, but not relevant to the concept of an expansionary gap.

What Is an Expansionary Gap Equal To