If the output gap equals -3.2 percent, then

Question

Quizplus · Accepted Answer

A negative output gap indicates that actual GDP is lower than potential GDP. This suggests there is a recessionary gap, which means the economy is operating below its potential and there is an excess of cyclical unemployment, which is the unemployment caused by a lack of demand for goods and services. Therefore, option B is the correct answer. Option A is incorrect because the output gap does not provide any information about structural and frictional unemployment. Option C is incorrect because, as explained earlier, a negative output gap implies the presence of cyclical unemployment. Option D is also incorrect because potential GDP is always higher than actual GDP during a recessionary gap.

If the Output Gap Equals -3.2 Percent, Then