When the output gap is positive, it represents ________ gap, and when it is negative, it represents ________ gap.
A) a recessionary; an inflationary
B) an inflationary; an employment
C) an inflationary; a recessionary
D) an employment; an unemployment
E) None of the above answers is correct.

Question

Quizplus · Accepted Answer

When the output gap is positive, it represents an inflationary gap because the economy is operating above its potential and there may be shortages of goods and services, leading to higher prices. Conversely, when the output gap is negative, it represents a recessionary gap because the economy is operating below its potential and there may be excess capacity and unemployment, leading to downward pressure on prices. Therefore, option C is the correct answer.

When the Output Gap Is Positive, It Represents ________ Gap