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Figure: Output Gap
-(Figure: Output Gap) Look at the figure Output Gap. If the economy is producing at Y₂, then it has a(n) _____ gap, as _____ real GDP exceeds _____ real GDP, and the Federal Reserve should use _____ monetary policy.

Question

Use the following to answer questions :
Figure: Output Gap

-(Figure: Output Gap) Look at the figure Output Gap. If the economy is producing at Y₂, then it has a(n) _____ gap, as _____ real GDP exceeds _____ real GDP, and the Federal Reserve should use _____ monetary policy.

Quizplus · Accepted Answer

If the economy is producing at Y₂, then it has a recessionary gap, as actual real GDP (YS1) is lower than potential real GDP (YP). Therefore, the Federal Reserve should use expansionary monetary policy to stimulate the economy and close this gap. Option A is incorrect because actual real GDP is lower than potential real GDP, not the other way around. Option C is incorrect because the economy is in a recessionary gap, not an inflationary gap. Option D is incorrect because it indicates that the economy has an inflationary gap, which is not the case in the figure.

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