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.