Table 16-4

-Refer to Table 16-4.Consider the hypothetical information in the table above for potential real GDP,real GDP and the price level in 2013 and in 2014 if the Congress and the president do not use fiscal policy.If the Congress and the president use fiscal policy successfully to keep real GDP at its potential level in 2014,which of the following will be lower than if the Congress and the president had taken no action?
A)real GDP and the unemployment rate
B)real GDP and the inflation rate
C)real GDP and potential GDP
D)potential GDP and the inflation rate

Question

Table 16-4
 
-Refer to Table 16-4.Consider the hypothetical information in the table above for potential real GDP,real GDP and the price level in 2013 and in 2014 if the Congress and the president do not use fiscal policy.If the Congress and the president use fiscal policy successfully to keep real GDP at its potential level in 2014,which of the following will be lower than if the Congress and the president had taken no action?
A)real GDP and the unemployment rate 
B)real GDP and the inflation rate 
C)real GDP and potential GDP 
D)potential GDP and the inflation rate

Quizplus · Accepted Answer

If the Congress and the President do not use fiscal policy, real GDP in 2014 will be higher than potential GDP, which will result in an inflationary gap, leading to a higher inflation rate. By using fiscal policy to keep real GDP at its potential level, this inflationary gap will be eliminated, resulting in a lower inflation rate. However, real GDP will still be lower than it would have been without fiscal policy intervention. Therefore, the correct answer is B, as real GDP and the inflation rate will be lower than if no action was taken.

Table 16-4 -Refer to Table 16-4.Consider the Hypothetical Information in the Table