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If real GDP is 21 trillion and potential GDP is 20 trillion, how big is the output gap?

A. 20 trillion
B. 21 trillion
C. 1 trillion
D. 0.05 percent of potential GDP

Answer :

Final answer:

The output gap is the difference between actual real GDP and potential real GDP, amounting to $1 trillion, or 5%, of the potential GDP. so,the correct option is: c) 1 trillion and d) 0.05 percent of potential GDP.

Explanation:

The question revolves around the concept of an output gap, which is the difference between potential real GDP and actual real GDP. In this case, with a real GDP of $21 trillion and a potential GDP of $20 trillion, the output gap would be the real GDP minus the potential GDP.

Output gap = Actual real GDP - Potential real GDP

Therefore, in this scenario, the output gap is:

Output gap = $21 trillion - $20 trillion = $1 trillion

This represents an inflationary gap where the actual GDP exceeds the potential GDP, indicating an economy that is possibly overheating. When expressed as a percentage of potential GDP, the output gap would be:

Output gap percentage = ($1 trillion / $20 trillion) * 100%

Output gap percentage = 5%

1 trillion and 0.05 percent of potential GDP since the output gap in dollar terms is $1 trillion, and this is equivalent to 5%, not 0.05%, of the potential GDP.

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Rewritten by : Jeany

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