Based on the Diagram, If Potential Output Equals 5,000 and the Real

Multiple Choice

Based on the diagram, if potential output equals 5,000 and the real interest rate is 3 percent, then there is ________ gap and the Fed must ________ the real interest rate so that output will equal potential output.

A) a recessionary; raise
B) a recessionary; reduce
C) no output; not change
D) an expansionary; raise