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Scenario: Fiscal Policy
Consider the economy of Arcadia. Its households spend 75% of increases in their income. There are no taxes and no foreign trade. Its currency is the arc. Potential output is 600 billion arcs.
-(Scenario: Fiscal Policy) Look at the scenario Fiscal Policy. Suppose actual real GDP in Arcadia is 500 billion arcs. This economy has:
A)a recessionary gap.
B)production at the full employment level.
C)an inflationary gap.
D)a liquidity trap.

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Quizplus · Accepted Answer

Since the potential output is 600 billion arcs and the actual real GDP is only 500 billion arcs, there is a gap between the potential output and the actual output. This suggests that the economy is producing below its full capacity and experiencing a recessionary gap.

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