Multiple Choice
Which of the following is a common argument made by opponents of active stabilization policy in macroeconomics?
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1. Introduction to Macroeconomics
Introduction to Economics
Multiple Choice
In early 1975, the United States experienced a significant output gap. What does a negative output gap indicate about the economy during that period?
A
Potential GDP was declining faster than actual GDP, indicating economic growth.
B
The economy was operating at full employment with no output gap.
C
Actual GDP was above potential GDP, indicating an overheated economy and rising inflation.
D
Actual GDP was below potential GDP, indicating underutilized resources and high unemployment.
Verified step by step guidance1
Step 1: Understand the concept of the output gap. The output gap measures the difference between actual GDP and potential GDP, where potential GDP represents the maximum sustainable output an economy can produce without causing inflation.
Step 2: Define a negative output gap. A negative output gap occurs when actual GDP is less than potential GDP, meaning the economy is producing below its capacity.
Step 3: Analyze the implications of a negative output gap. This situation indicates underutilized resources, such as labor and capital, leading to higher unemployment and lower inflationary pressures.
Step 4: Contrast with other scenarios. For example, if actual GDP were above potential GDP, it would indicate an overheated economy with rising inflation, which is not the case here.
Step 5: Conclude that in early 1975, the negative output gap meant the U.S. economy was operating below its potential, reflecting economic slack and higher unemployment.
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