If potential output equals 3,000 and short-run equilibrium output equals 3,500,there is a(n)_________ 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 an expansionary gap because the short-run equilibrium output (3,500) is greater than the potential output (3,000). To close this gap, the Bank of Canada should raise real interest rates to reduce spending and bring output back to potential.

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