Figure 9-4

-In Figure 9-4, if the economy is in a recessionary gap, what must happen to reach potential GDP?

Question

Figure 9-4
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-In Figure 9-4, if the economy is in a recessionary gap, what must happen to reach potential GDP?

Quizplus · Accepted Answer

In a recessionary gap, aggregate expenditure is below potential GDP. To reach potential GDP, aggregate expenditure must increase. This can come from an increase in any component of aggregate demand (consumption, investment, government spending, or net exports). As aggregate expenditure increases, firms will increase production and employment, and the economy will move closer to potential GDP. This increase in aggregate expenditure can occur without an increase in the price level, but if the increase in aggregate expenditure outstrips the economy's capacity to produce goods and services, then the price level will begin to rise as firms experience shortages of inputs and raise prices to cover their costs. Therefore, the answer is B.

Figure 9-4 ​

Figure 9-4