If real GDP stays below potential GDP,
A)the AD curve will begin to shift to the left.
B)the IA line will shift down.
C)potential GDP will decline.
D)the IA line will shift up.
E)the AD curve will begin to shift to the right.

Question

Quizplus · Accepted Answer

When real GDP stays below potential GDP, it indicates a negative output gap, which implies an excess supply of goods and services in the economy. Hence, the IA line will shift down because there will be a decrease in prices due to low demand for goods and services. This will allow firms to reduce their prices to attain equilibrium at lower levels of output than potential GDP.

If Real GDP Stays Below Potential GDP