If, in addition,
𝑅
𝑡
=
𝑟
¯
, short run output [ Select ] .

Question

If, in addition, 
𝑅
𝑡
=
𝑟
¯
, short run output [ Select ] .

BlackTom AI · Accepted Answer

The question as given is: If, in addition, 
Rt = r̄, short run output [ Select ]. There are no answer options provided to analyze individually, so I cannot perform a per-option evaluation. Nevertheless, I can discuss the underlying concept and the given proposed answer.

In macroeconomic models that use the output gap concept, Rt denotes the real interest rate and r̄ (often written as r-bar) denotes the natural (or neutral) real interest rate. When the real rate equals the natural rate (Rt = r̄), monetary policy is considered to be neither expansionary nor contractionary relative to the economy’s sustainable growth path. In simple IS-LM or New Keynesian frameworks, this alignment implies that the economy is at its potential output, meaning the output gap is zero.

If the short-run output is assessed relative to potential output, a zero output gap means the short-run output is exactly at its normal, sustainable level, not above or below it. Therefore, the natural conclusion in most standard analyses would be that short-run output is at its potential level, rather than being positive (above potential) or negative (below potential).

Given that the provided answer in the data is "is positive," that choice would typically be incorrect under the usual interpretation, because Rt = r̄ does not inherently imply a positive (above-potential) output gap; it more commonly implies zero output gap. Misconceptions that could lead to the incorrect choice include thinking that any equality of rates triggers expansionary stimulus, or confusing real interest rate equality with a requirement for higher output.

If you had actual option choices, I would map Rt = r̄ to the zero-output-gap outcome and then explain why each alternative does or does not imply a deviation from potential output. Since options are missing here, the key takeaway is: Rt = r̄ implies output at its potential level, i.e., short-run output is at the natural level, not necessarily positive relative to potential.

FA25 ECON 302 002 Final Exam (Chapters 7-9, 11-13, 19-20): Sample Questions

If, in addition, 𝑅 𝑡 = 𝑟 ¯ , short run output [ Select ] .

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