Question83 Consider previous Figure, which contains data for actual real GDP (RGDP) and two different potential RGDP estimates labeled RGDP-A and RGDP-B (Real GDP is measured in billions of dollars).Suppose “true” potential RGDP is given by RGDP-A, and the Reserve Bank of Australia believes potential GDP is given by RGDP-B. (The RBA cannot observe the true potential output).Choose the correct statement: Select one alternative: Given the policy to be implemented in Q4 2019, it is likely that price levels will fall. The RBA will implement the right but inaccurate policy in Q4 2019 Since in Q4 2019 the true potential is always below the perceived potential, it does not matter which policy is implemented The RBA will implement the wrong policy in Q4 2019. The RBA will implement the right and accurate policy in Q4 2019 ResetMaximum marks: 2 Flag question undefined

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BlackTom AI · Accepted Answer

Question to analyze: We are given data for actual real GDP (RGDP) and two potential RGDP estimates labeled RGDP-A and RGDP-B. True potential RGDP is RGDP-A, but the RBA believes potential GDP is RGDP-B. We must choose the correct statement about Q4 2019.

Option 1: 'Given the policy to be implemented in Q4 2019, it is likely that price levels will fall.' This statement links the policy to a predictable deflationary outcome. However, since the key issue is which estimate the RBA uses to guide policy, this option addresses price level movements rather than the correctness of the policy choice itself given misperceptions about potential output. It does not directly reflect the misalignment between true potential and perceived potential driving the policy outcome.

Option 2: 'The RBA will implement the right but inaccurate policy in Q4 2019.' This suggests the policy chosen would be appropriate if the perception were accurate, but since the RBA relies on RGDP-B which is not the true potential RGDP, the policy choice would be misaligned with the true output gap. The descriptor 'right but inaccurate' is contradictory: if the policy is based on a misperception of potential output, it is unlikely to be the 'right' policy for the true conditions.

Option 3: 'Since in Q4 2019 the true potential is always below the perceived potential, it does not matter which policy is implemented' This asserts a universal relationship that the true potential is always below perceived potential, rendering policy irrelevant. This is an overgeneralization and ignores how policy responses depend on the actual output gap, not a fixed positional relationship. It incorrectly claims irrelevance of policy choice.

Option 4: 'The RBA will implement the wrong policy in Q4 2019.' This directly ties to the setup: true potential is RGDP-A, but the RBA uses RGDP-B to judge the gap. If RGDP-B overstates or understates potential, the resulting policy would react to an incorrect assessment of the output gap, leading to a policy that is not aligned with the true economic conditions. The idea of acting on a misperceived potential output makes it plausible that the implemented policy is incorrect relative to the true economic state.

Option 5: 'The RBA will implement the right and accurate policy in Q4 2019' This would be true only if RGDP-B perfectly equaled RGDP-A or if the policy framework compensated for the misperception. Given the stated scenario (RBA cannot observe true potential and believes RGDP-B is potential), this option asserts a perfect alignment that the setup does not support, making it unlikely.

A few additional guiding notes: The core distinction here is between true potential output (RGDP-A) and perceived potential (RGDP-B). When policymakers misestimate potential, their stance on the output gap is flawed, which tends to yield an inappropriate policy stance. That makes the option asserting a wrong policy the most consistent with a mismatch between true potential and perceived potential. Other options either misstate the effect of misperception, rely on incorrect generalizations, or claim inevitabilities that aren’t supported by the setup.

In sum, the reasoning across the options points toward the idea that the misperception of potential output would lead the RBA to implement a policy that is not appropriate for the true conditions, i.e., a wrong policy in Q4 2019. The remaining options either mischaracterize the implications of the misperception or claim certainty that the situation does not actually provide.

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