Aggregate demand is at level less than full employment

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Starting with a positive output gap where aggregate demand is at a level less than full employment, assume that the annual Real GDP growth rate is equal to 4% and the annual supply side growth rate is equal to 2.5%. As a result:

Aggregate supply will grow equal to supply side growth and aggregate demand will keep pace. Therefore the output gap will remain constant.

Aggregate supply will grow equal to supply side growth and aggregate demand will grow at a faster rate. Therefore the output gap will shrink.

Aggregate supply will grow equal to supply side growth and aggregate demand will decrease. Therefore the output gap will increase.

Aggregate supply will grow equal to supply side growth and aggregate demand growth will be positive but grow at a slower rate. Therefore the output gap will increase.

Reference no: EM131200336

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