Table 27-4

-Refer to Table 27-4. Consider the hypothetical information in the table above for potential real GDP, real GDP and the price level in 2013 and in 2014 if the Congress and the president do not use fiscal policy. If the Congress and the president use fiscal policy successfully to keep real GDP at its potential level in 2014, which of the following will be lower than if the Congress and the president had taken no action?
A) real GDP and the unemployment rate
B) real GDP and the inflation rate
C) real GDP and potential GDP
D) potential GDP and the inflation rate

Question

Table 27-4
 
-Refer to Table 27-4. Consider the hypothetical information in the table above for potential real GDP, real GDP and the price level in 2013 and in 2014 if the Congress and the president do not use fiscal policy. If the Congress and the president use fiscal policy successfully to keep real GDP at its potential level in 2014, which of the following will be lower than if the Congress and the president had taken no action?
A) real GDP and the unemployment rate 
B) real GDP and the inflation rate 
C) real GDP and potential GDP 
D) potential GDP and the inflation rate

Quizplus · Accepted Answer

If Congress and the president take no action, real GDP will be below potential GDP indicating a recessionary gap. In this scenario, the inflation rate will be low but positive since there will be some inflation due to cost-push factors. If they use fiscal policy to keep real GDP at its potential level, the inflation rate will be lower compared to the scenario where they take no action since there won't be any demand-pull inflation. However, real GDP will still be below potential GDP indicating a recessionary gap. Therefore, the best choice is B - real GDP and the inflation rate.

Table 27-4 -Refer to Table 27-4. Consider the Hypothetical Information in the Hypothetical