If potential output equals 4,000 and short-run equilibrium output equals 3,500,there is a ______ gap and the Bank of Canada must ________ real interest rates in order to close the gap.
A) recessionary;raise
B) recessionary;lower
C) recessionary;not change
D) expansionary;raise
E) expansionary;lower

Question

Quizplus · Accepted Answer

There is a recessionary gap because the short-run equilibrium output (3,500) is less than the potential output (4,000). To close this gap, the Bank of Canada should lower real interest rates to stimulate economic activity.

If Potential Output Equals 4,000 and Short-Run Equilibrium Output Equals