In the short-run, an output gap occurs because

Question

BlackTom AI · Accepted Answer

Let’s parse the question and evaluate each proposed reason for a short-run output gap.
Option a: wages and some prices have not adjusted sufficiently to maintain output at its potential level. This is the classic explanation for a short-run output gap in many macro models: price and wage stickiness prevent the economy from instantaneously adjusting to potential output, causing actual output to deviate from potential in the short run. This reasoning aligns with Keynesian and short-run aggregate supply concepts.
Option b: there is insufficient supply of goods and services. While a temporary supply constraint can reduce output, the standard short-run output gap is typically attributed to demand-side or price/wage rigidity factors rather than a persistent lack of productive capacity. This option misattributes the gap to a lack of supply capacity rather than price/wage adjustments.
Option c: there is insufficient demand for goods and services. Insufficient aggregate demand can cause an output gap, but the question asks why a short-run gap occurs; this option describes one proximate cause. However, the more precise and structural reason emphasized in many theories is the slow adjustment of wages and prices; so this option is not as directly addressing the mechanism of the gap in the short run.
Option d: of a decline in the economy's potential output. A decline in potential output would shift the production possibility frontier and is not what is meant by a short-run output gap; an output gap is typically a deviation between actual output and potential output, not a change in potential output itself. This makes the option incorrect.
Option e: wages and prices are fully flexible. If wages and prices were fully flexible, the economy would quickly adjust and the short-run output gap would be eliminated; thus this statement contradicts the occurrence of a short-run gap and is incorrect.
Overall, option a correctly identifies the core reason for a short-run output gap by pointing to imperfect adjustment of wages and some prices, which prevents output from reaching its potential in the short run. The other options either misattribute the cause, describe a different phenomenon, or assume conditions (full flexibility) that would not produce a gap.

Academic Courses Test#3

In the short-run, an output gap occurs because

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