An output gap with Y

Question

An output gap with Y < Y^* A)is desirable because it keeps wage costs low. B)represents a loss of output due to unemployed resources. C)tends to force prices up. D)occurs when there is excess demand. E)is known as an inflationary boom.

Quizplus · Accepted Answer

An output gap with Y < Y^* indicates that the actual output is less than the potential output. It means there are unemployed resources in the economy, such as labor and capital, which leads to a loss of output. This is not desirable because it means the economy is not operating at its full capacity, and there are welfare losses associated with this. It does not necessarily keep wage costs low and tends to force prices down rather than up. It occurs when there is insufficient demand, not excess demand, and it is not known as an inflationary boom.

An Output Gap with Y < Y*

An Output Gap with Y < Y^*