If potential output equals 3,000 and short-run equilibrium output equals 3,500, there is a(n)________ gap and the Federal Reserve must ________ real interest rates in order to close the gap.
A)recessionary; raise
B)recessionary; reduce
C)recessionary; not change
D)expansionary; raise

Question

Quizplus · Accepted Answer

When short-run equilibrium output exceeds potential output there is an expansionary gap. To close this gap, the Federal Reserve must raise real interest rates, which will reduce investment and consumption expenditures.

If Potential Output Equals 3,000 and Short-Run Equilibrium Output Equals