The output gap can be difficult to measure
because potential GDP must be estimated,
and economists’ estimates differ. In 2012,
the Congressional Budget Office (CBO)
estimated that potential GDP was about
$1 trillion lower than the CBO’s 2007 forecast
had predicted.
a. Was the output gap larger or smaller (in absolute
value) in 2012 than it would have been
if the CBO’s 2007 forecast had been correct?
Briefly explain.
b. If the CBO’s 2007 forecast had been correct, is
it likely that the inflation rate in 2012 would
have been higher or lower than it actually
was? Briefly explain.