ECONOMICS
FISCAL POLICY
|
Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
|
|
|
current GDP is greater than potential GDP
|
|
|
current GDP is less than potential GDP
|
|
|
current GDP is equal to potential GDP
|
|
|
the unemployment rate is greater than 4-6%
|
|
|
the unemployment rate is equal to the natural rate of unemployment
|
Detailed explanation-1: -An inflationary gap exists when the demand for goods and services exceeds production due to higher levels of employment, increased trade activities, or elevated government expenditure. The real GDP can exceed the potential GDP, resulting in an inflationary gap.
Detailed explanation-2: -The difference between the level of real GDP and potential GDP is known as the output gap. When the output gap is positive-when GDP is higher than potential-the economy is operating above its sustainable capacity and is likely to generate inflation.
Detailed explanation-3: -An inflationary gap occurs when the economy is operating above full employment. It represents the extra output as measured by GDP between what it would be under the natural rate of unemployment and the reported GDP number. Think of it as the rise in GDP driven by inflation.
Detailed explanation-4: -When there is an inflationary gap, the short-run aggregate supply intersects the aggregate demand to the right of the long-run aggregate supply. The positive difference between the real GDP and the potential GDP on the x-axis is the inflationary gap.
Detailed explanation-5: -There is a negative relationship between the level of output and the rate of unemployment. Therefore, if real GDP falls below the potential GDP level, the real unemployment rate will rise above the natural rate of unemployment.