The International Monetary Fund (IMF) publishes the World Economic Outlook. Go to www.imf.org and look at the most recent version available. The IMF measures the output gap as the difference between real GDP and potential GDP as a percentage of potential GDP. A negative value for the output gap means that real GDP is below potential GDP. Look at the data on the output gap for Japan, the United Kingdom, and the United States for 2015 to 2020. (The values for the later years are forecasts.) (Under World Economic Outlook, click “DATABASE,” then under “Download WEO Data” choose “By Countries (country-level data).” Select “Advanced economies,” choose Japan, the United Kingdom, and the United States, and then choose “Output gap in percent of potential GDP.”)
a. Which country had the largest output gap (in absolute value) in 2015? Which country had the smallest output gap?
b. Discuss what fiscal policies the governments of these countries could use to bring the output gaps to zero.
c. Describe at least two problems that these countries would have in implementing your suggested policies.