Question #2301

If the output an economy can achieve when all resources are productively employed is $120 billion and in the current year actual real GDP is on $114 billion, the output gap would be

• 2 per cent
• 4 per cent
• 5 per cent
• 6 per cent

Answer #11490

Answer: 5 per cent

Explanation

The answer is c - 5 per cent

If all the productive resources - labour, land, capital - are being fully utilised in production then we say that the economy is operating at full capacity or at its potential.

The difference between actual real GDP level in any period and Potential GDP level is the output gap, which is the percentage deviation of actual output from potential.

1. Potential GDP = $120 billion.

2. Actual GDP = $114 billion.

3. Output gap = Difference between actual and potential expressed as a percentage of potential.

4. So, 100 times (120 - 114)/120 = 5 per cent.