Consider a Very Small Economy with a Potential Output of £10

question 1

Multiple Choice

Consider a very small economy with a potential output of £10 billion. The actual output is £7 billion while the inflation level is 4 per cent. Which of the following can definitely be concluded if the long- run aggregate supply curve shifts to £9.5 billion?

• A) The target rate of inflation in this economy is 4 per cent.
• B) The output gap is reduced to negative £2.5 billion due to the real business cycle effect.
• C) The long-run unemployment level in this economy is 4 per cent.
• D) The output gap changes to negative £0.5 billion as the long-run aggregate supply curve

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