Question 9 Assume that by the end of the year actual output is equal to potentia

Question

Question 9 Assume that by the end of the year actual output is equal to potential output at full employment. Also assume that the Real GDP growth rate in the following is equal to 3%. As a result: Question 9 options: A. Aggregate supply will grow equal to supply side growth and aggregate demand will decrease. Therefore there will be a positive output gap. B. Aggregate supply will grow equal to supply side growth and aggregate demand growth will be positive but grow at a slower rate. Therefore there will be a positive output gap. C. Aggregate supply will grow equal to supply side growth and aggregate demand will grow at a faster rate. Therefore the inflation rate will rise. D. Aggregate supply will grow equal to supply side growth and aggregate demand will keep pace. Therefore the output gap will remain constant and roughly equal to zero.

Explanation / Answer

Answer: D

Since potential output and actual output are equal, there should not be any output gap. It happens only in full employment, where all factors of production are fully utilized. It also helps to restrict inflation.

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