In Figure 1 above if the economy were at Y1 then we would expect there to be: A) an increase in production since PAE actual output. C) no change in production since PAE = actual output. D) a decrease in production since PAE actual output.

Question

In Figure 1 above if the economy were at Y1 then we would expect there to be:
A) an increase in production since PAE < actual output. 
B) an increase in production since PAE > actual output. 
C) no change in production since PAE = actual output. 
D) a decrease in production since PAE > actual output.

Quizplus · Accepted Answer

If the economy were at Y1, the actual output would be less than the potential output, as indicated by the output gap. At the same time, PAE is greater than the actual output, which means that there is excess demand in the economy. This would lead firms to increase production in order to meet this excess demand, resulting in an increase in production. Therefore, choice B is the correct answer.

In Figure 1 Above If the Economy Were at Y1