The table above gives the aggregate demand and aggregate supply schedules in Lotus Land. In short- run equilibrium, there is .
A) an inflationary gap of $100
B) a recessionary gap of $200
C) a recessionary gap of $100
D) an inflationary gap of $200

Question

Quizplus · Accepted Answer

A recessionary gap occurs when the equilibrium level of output is less than the full-employment level of output. In this case, at the point where AD and AS intersect, output is 400 and the full-employment level of output is 500. Therefore, there is a recessionary gap of $100 (500 - 400 = $100). Option A and D are incorrect because both state inflationary gaps, which occur when the equilibrium level of output is greater than the full-employment level of output.

The Table Above Gives the Aggregate Demand and Aggregate Supply