Ceteris Paribus,if current output has fallen below potential ________.
A)a positive inflation gap will ensue
B)it is likely that the equilibrium real rate has fallen below the policy rate
C)a negative unemployment gap will ensue
D)it is likely that the equilibrium real rate has risen above the policy rate
E)none of the above

Question

Quizplus · Accepted Answer

When current output falls below potential, it often indicates that the equilibrium real interest rate (the interest rate at which the economy would be at its potential output) has fallen below the policy rate set by the central bank. This discrepancy can lead to decreased investment and spending, further suppressing economic activity.

Ceteris Paribus,if Current Output Has Fallen Below Potential ________