If, in addition,
𝑅
𝑡
=
𝑟
¯
, short run output
[ Select ]
is positive
equals zero
is negative
.

Question

If, in addition, 
𝑅
𝑡
=
𝑟
¯
, short run output 
[ Select ]
is positive
equals zero
is negative
 .

BlackTom AI · Accepted Answer

The question presents a scenario where Rt = r̄, and asks what the short-run output [Select] is.
Since the provided answer option is 'equals zero', I will focus on interpreting why the output (likely the output gap) would be zero when the real interest rate matches the natural (or neutral) rate.
First, think about the intuition: when the policy rate (or real rate) is equal to the neutral rate, monetary policy is neither expansive nor contractionary relative to the economy’s long-run sustainable path. In many macro models, this alignment implies that aggregate demand is at a level consistent with potential output, so the short-run deviation of output from potential (the output gap) is zero.
If the statement refers to the output gap: with Rt = r̄, demand is neither above nor below the level that would push output above or below potential, so the gap equals zero. This means the economy is operating at its potential in the short run, absent other shocks.
If, instead, one misreads 'short-run output' as actual level of output rather than the gap, it's important to note that Rt = r̄ does not automatically imply that actual output is zero or negative; it typically implies that the deviation from potential (the gap) is zero, while actual output could still be positive in absolute terms. The key interpretation commonly tied to this setup is about the output gap being zero, not that actual output equals zero.
Since there are no other answer choices provided to compare, there is no alternative explanation to evaluate in this item. The core misconception to guard against would be thinking that matching the neutral rate forces the economy to produce zero output, which conflates the idea of an output gap (zero deviation from potential) with the absolute level of output.
In summary, under Rt = r̄, the short-run output gap most commonly is interpreted as equal to zero, indicating output is at its potential level in the short run, rather than being positive or negative. If the question intended a different interpretation of 'short-run output' (e.g., referring to the absolute level of output rather than the gap), that would require additional specification, but as posed, 'equals zero' aligns with the standard zero-output-gap result.

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 ] is positive equals zero is negative .

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