Based on the diagram, if potential output equals 5,000 and the real interest rate is 1 percent, then there is ________ gap and the Fed must ________ the real interest rate so that output will equal potential output.
A)a recessionary; raise
B)a recessionary; reduce
C)an expansionary; reduce
D)an expansionary; raise

Question

Based on the diagram, if potential output equals 5,000 and the real interest rate is 1 percent, then there is ________ gap and the Fed must ________ the real interest rate so that output will equal potential output.   
A)a recessionary; raise 
B)a recessionary; reduce 
C)an expansionary; reduce 
D)an expansionary; raise

Quizplus · Accepted Answer

Along the r = 1 percent expenditure line, the equilibrium output is 7,000 which results in an expansionary gap of 2,000. To close this gap the Fed must raise real interest rates.

Based on the Diagram, If Potential Output Equals 5,000 and the Real