The Figure Below Shows the Price Level, Real GDP, and the Potential

question 103

Multiple Choice

The figure below shows the price level, real GDP, and the potential output for an economy. According to those who favor a passive approach to policy, once the expansionary gap is eliminated, the economy will end up at:

• A) point A.
• B) point B.
• C) point C.
• D) a point to the right of point A.
• E) a point below C.

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Definitions:

Profits

The financial benefit that is realized when revenue generated from a business activity exceeds the expenses, costs, and taxes needed to sustain the activity.

Profit-maximizing

A strategy where a firm sets its production level and pricing to achieve the highest possible profit.

Resource Combination

The process of organizing and combining different resources like capital, labor, and raw materials, to produce goods or services.

MRPS

Marginal Revenue Product of Labor, a measure of the additional revenue generated by hiring an additional worker, holding other factors constant.