Final answer:
The economy's output gap is -$1 billion, which can also be expressed as -12.5 percent since the actual output is less than the potential output.
Option 'B' is the correct.
Step-by-step explanation:
If the potential output for an economy equals $8 billion and the actual output equals $7 billion, then the economy's output gap is the difference between these two values.
The output gap can be calculated by subtracting the actual output from the potential output, which in this case is $8 billion - $7 billion = $1 billion.
Since the actual output is less than the potential output, the economy is experiencing a recessionary gap, and this gap is negative.
Therefore, the correct expression for this economy's output gap is A. -$1 billion. Additionally, the output gap can also be expressed as a percentage. To find the percentage, you divide the output gap by the potential output and then multiply by 100, which results in (-$1 billion / $8 billion) × 100 = -12.5%. So the correct percentage expression of the output gap is D. -12.5 percent.