The figure below shows the determination of the equilibrium price level and real GDP in an aggregate demand-aggregate supply model.If the economy is at point H,there is a(n):

A)expansionary gap of $300 billion.
B)recessionary gap of $300 billion.
C)recessionary gap of $10 billion.
D)expansionary gap of $20 billion.
E)expansionary gap of $10 billion.

Question

The figure below shows the determination of the equilibrium price level and real GDP in an aggregate demand-aggregate supply model.If the economy is at point H,there is a(n):

A)expansionary gap of $300 billion. 
B)recessionary gap of $300 billion. 
C)recessionary gap of $10 billion. 
D)expansionary gap of $20 billion. 
E)expansionary gap of $10 billion.

Quizplus · Accepted Answer

The economy is producing at Y1 which is below the potential output level of Yp. This means there is a recessionary gap of $300 billion, which is the difference between Yp and Y1.

The Figure Below Shows the Determination of the Equilibrium Price