An economy sits at $900m with potential at $1,000m. A programme raises potential to $1,100m. What happens to the output gap?

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Question

An economy sits at $900m with potential at $1,000m. A programme raises potential to $1,100m. What happens to the output gap?

Accepted Answer

It widens from $100m to $200m, because output stays at $900m — Award 1 mark. Capacity was not the constraint, so raising it does nothing for a demand shortfall.

Answer

It closes, because capacity has risen

Answer

It narrows from $100m to $50m

Answer

It is unchanged at $100m

Answer

It widens from $100m to $200m, because output stays at $900m

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