Question

If real GDP at full employment is $5 billion while current GDP is $6 billion, a(n) _____ exists, and will require a _____ in spending to bring the economy back to full employment.

Answer 1

If real GDP at full employment is $5 billion while current GDP is $6 billion, an INFLATIONARY GAP exists, and will require a DECREASE in spending to bring the economy back to full employment.

Step-by-step explanation:

Real GDP measures the size of the economy in real dollars (dollars discounted for inflation), while the nominal or current GDP measures the economy in nominal dollars (not adjusted for inflation).

If the real GDP at full employment is lower than the nominal or current GDP, that means that the economy is suffering from high inflation. The only way to reverse this situation is to decrease spending in order to decrease inflation, so that the currency stops losing purchasing value.