Real GDP measures what the economy produces by valuing all final goods and services at constant prices from a chosen base year. This keeps the price level fixed, so changes in Real GDP reflect only changes in the quantity of goods and services produced, not inflation. If we used current-year prices, we’d be counting price changes as well, which is nominal GDP. Real GDP thus uses base-year prices and is expressed in constant dollars.

Positive economics describes how the economy behaves, using facts and data to describe relationships and test predictions. Describing economic phenomena with factual evidence is exactly what this approach does, focusing on what is observable and verifiable rather than on value judgments. The idea of prescribing economic policy belongs to normative analysis, which deals with what should be. Relying on opinion rather than data conflicts with the empirical nature of positive economics, which prioritizes evidence. While studying welfare effects can involve empirical work, the essence of positive economics is describing and explaining what is, based on facts.

A Positive Output Gap occurs when actual output is higher than the economy’s sustainable level, meaning the economy is operating to the right of its potential. The potential level of output is what you’d get if resources were fully employed, and it’s represented by the vertical LRAS line. When growth pushes actual GDP above this point, firms are using resources more intensely than is sustainable, unemployment falls below the natural rate, and inflationary pressures tend to rise as demand outpaces capacity. That’s the overheating scenario the diagram captures with a spot to the right of LRAS. In contrast, a gap to the left of LRAS would be a negative gap (actual output below potential), a gap exactly at LRAS would be zero, and automatic stabilizers describe policy features that dampen fluctuations rather than define the gap itself.

Government debt is the stock of obligations the government has outstanding at a given time. It represents money the government has promised to repay in the future, built up as deficits were financed by borrowing. This makes it a stock concept—current liabilities that can rise with new borrowing or fall with repayments. The amount in circulation is currency, not debt. The annual budget deficit is a flow—the shortfall in a single year, not the total liabilities carried over time. Saying money owed by the central government is close but vague; describing it as the outstanding debt emphasizes the current, actual liabilities that are owed to lenders. So the best description is the outstanding debt of the central government.