When an economy is experiencing a negative output gap, there is:
A) deflationary pressure due to low demand.
B) inflationary pressure due to high demand.
C) a reduction in purchasing power caused by an inflation rate that is higher than the nominal interest rate.
D) an increase in inflation that puts it at a higher level than output.

Question

Quizplus · Accepted Answer

A negative output gap means that actual output is lower than potential output, indicating that there is unused capacity in the economy. This can lead to low demand for goods and services, causing deflationary pressure.

When an Economy Is Experiencing a Negative Output Gap, There