In Beyonceland, real GDP fell continuously from $200 billion in 2015 to $160 billion in 2016. Potential GDP remained constant at $180 billion. Between 2015 and 2016, Beyonceland
A) went from a peak to a trough.
B) went from expansion to contraction.
C) went from a deflationary gap to an inflationary gap.
D) went from a positive output gap to a negative output gap.
E) had a growth rate of -25 percent.

Question

Quizplus · Accepted Answer

Real GDP fell continuously, indicating a decline in economic activity. Meanwhile, potential GDP remained constant, so the output gap, which is the difference between real GDP and potential GDP, became more negative. Therefore, Beyonceland went from a positive output gap (when real GDP was above potential GDP) in 2015 to a negative output gap (when real GDP was below potential GDP) in 2016.

In Beyonceland, Real GDP Fell Continuously from $200 Billion in 2015