Q: What is the output gap, and how is it calculated?

The difference between real GDP and potential GDP: $$\text{Output Gap} = \text{Real GDP} - \text{Potential GDP}$$

Question 1

Which of the following best defines Potential GDP?

Accepted Answer

The maximum GDP an economy can achieve when all inputs are fully employed.

Question 2

If a country’s actual real GDP per person is consistently below its potential GDP per person, what does this indicate?

Accepted Answer

Some inputs in the economy are unemployed or underutilized.

Question 3

Which of the following is NOT a factor that directly increases potential GDP?

Accepted Answer

A decrease in the labour force participation rate.

Question 4

The macroeconomic Production Possibilities Frontier (PPF) illustrates:

Accepted Answer

The maximum combinations of goods and services a country can produce when all inputs are fully employed.

Question 5

Suppose Canada’s real GDP per person grows from $$40,000 to 41$$,200 in one year. What is the annual growth rate? Use the formula $$	ext{Growth Rate} = \frac{	ext{New Value} - 	ext{Old Value}}{	ext{Old Value}} 	imes 100\%.$$

Accepted Answer

$$2.5\%$$

Question 6

Which of the following scenarios would most likely cause an outward shift in the macroeconomic PPF?

Accepted Answer

A breakthrough in renewable energy technology.

Question 7

What is the output gap, and how is it calculated?

Accepted Answer

The difference between real GDP and potential GDP: $$	ext{Output Gap} = 	ext{Real GDP} - 	ext{Potential GDP}$$

Question 8

During a recession, which of the following is most likely to occur?

Accepted Answer

Real GDP falls below potential GDP, resulting in a negative output gap.

Question 9

Which of the following best describes a business cycle expansion?

Accepted Answer

A period during which real GDP increases and approaches or exceeds potential GDP.

Question 10

If the annual growth rate of real GDP per person is $$2\%$$, approximately how many years will it take for the GDP per person to double? Use the Rule of 70: $$	ext{Years to Double} = \frac{70}{	ext{Growth Rate}}.$$

Accepted Answer

$$35$$ years

Question 11

Which of the following is an example of a positive economic shock?

Accepted Answer

Discovery of new oil reserves.

Question 12

Why is investment spending considered the most volatile component of GDP during business cycles?

Accepted Answer

It is postponable and highly sensitive to changes in economic expectations.

Question 13

Suppose a negative shock reduces investment spending, leading to layoffs. What is the likely next effect in the business cycle?

Accepted Answer

Reduced consumer spending due to higher unemployment.

Question 14

Which of the following best explains why business cycles are not regular or predictable?

Accepted Answer

They are often triggered by unexpected economic shocks, both internal and external.

Question 15

During the COVID-19 recession, what was a unique feature compared to previous recessions?

Accepted Answer

Government shutdowns and support programs led to increased savings and pent-up demand.

Question 16

If a country experiences an outward shift in its PPF due to technological change, which of the following is most likely to occur?

Accepted Answer

Potential GDP increases.

Question 17

Which formula correctly calculates the average annual economic growth rate over a period?

Accepted Answer

$$	ext{Average Growth Rate} = \left( \frac{	ext{GDP}_{	ext{final}}}{	ext{GDP}_{	ext{initial}}} \$$right)^{\frac{1}$${n}} - 1$$

Question 18

Which of the following is most likely to increase both productivity and living standards in the long run?

Accepted Answer

Investment in education and training (human capital).

Question 19

If the output gap is positive, which of the following is true?

Accepted Answer

Real GDP is above potential GDP, often associated with a boom.

Question 20

Which of the following best describes the relationship between economic growth and the stock of choices available to society?

Accepted Answer

Economic growth expands the stock of choices, which in turn leads to further growth.

Ch 7 Potential GDP, Economic Growth, and Business Cycles

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