If the output gap equals 1.8 percent, then

Question

Quizplus · Accepted Answer

An output gap occurs when actual GDP deviates from potential GDP. An output gap of 1.8 percent indicates that the current level of GDP is 1.8 percent above potential GDP, suggesting an expansionary gap. Choice A is incorrect because the output gap does not provide information about structural or frictional unemployment. Choice C is incorrect because an output gap implies a deviation from potential GDP, and potential GDP is the level of output at which there is no cyclical unemployment. Choice D is incorrect because an output gap of 1.8 percent suggests that actual GDP is greater than potential GDP, not less than potential GDP.

If the Output Gap Equals 1.8 Percent, Then