Question content area
Part 1
When is the output gap, defined as the percent difference between GDP and potential GDP,
positivepositive?
Part 2
A.
When actual real GDP
rises aboverises above
potential GDP.
B.
When the economy's capacity to produce
is exceeded byis exceeded by
its actual production.
C.
When the economy experiences
an inflationary booman inflationary boom.
D.
All of the above.
E.
A and C only.
Part 3
According to the Taylor rule, should the Fed raise or lower the federal funds rate when the output gap is
positivepositive?
A.
It should
lowerlower
the federal funds rate.
B.
It should
raiseraise
the federal funds rate.
C.
Gaps are self-correcting, so it should do neither.
D.
It should do neither and instead let fiscal policy close the gap.