Which of the following changes could create a more positive output gap in an economy?
(i) Government spending increases.
(ii) There is a reduction in taxes.
(iii) The risk premium increases.
(iv) The default rates on loans falls.
A)(i) and (ii)
B)(iii) and (iv)
C)(i), (ii), and (iv)
D)(ii), (iii), and (iv)

Question

Quizplus · Accepted Answer

A positive output gap occurs when actual output is higher than potential output. Increasing government spending (i) and reducing taxes (ii) can stimulate economic activity, leading to higher demand and output. A decrease in default rates on loans (iv) can improve financial conditions, encouraging investment and spending, thus also contributing to a more positive output gap. An increase in the risk premium (iii), however, typically leads to higher borrowing costs and could dampen economic activity, making it not conducive to creating a more positive output gap.

Which of the Following Changes Could Create a More Positive