Refer to the following table. What was the approximate output gap in 1974?

• A. The total government spending in 1974
• B. The unemployment rate in 1974
• C. The difference between actual GDP and potential GDP in 1974
• D. The inflation rate in 1974

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the concept of output gap. The output gap is defined as the difference between actual GDP and potential GDP, often expressed as a percentage of potential GDP. It measures how much the economy is underperforming or overheating relative to its full capacity.
2. Step 2: Identify the actual GDP for the year 1974 from the data provided in the table. This is the real output produced by the economy in that year.
3. Step 3: Identify the potential GDP for 1974, which represents the level of output the economy could produce if operating at full employment and efficient use of resources.
4. Step 4: Calculate the output gap using the formula: \[\text{Output Gap} = \frac{\text{Actual GDP} - \text{Potential GDP}}{\text{Potential GDP}} \times 100\%\] This will give the output gap as a percentage.
5. Step 5: Interpret the result. A positive output gap indicates the economy is producing above its potential (possibly causing inflation), while a negative output gap indicates underperformance and unused capacity.