Which of the following statements is most accurate?
A) Potential output is determined by current output.
B) When an expansionary gap exists, current output is below potential output.
C) Current output cannot exceed potential output.
D) During a recessionary gap, current output is below potential output.

Question

Quizplus · Accepted Answer

During a recessionary gap, current output is below potential output. This is because potential output represents the maximum sustainable output level that can be achieved without creating inflationary pressures, and during a recession, the actual output falls below this level due to a shortfall in aggregate demand. Therefore, option D is the most accurate statement. Option A is incorrect because potential output determines the capacity for current output rather than the other way around. Option B is incorrect because an expansionary gap occurs when current output exceeds potential output. Option C is incorrect because in the short run, current output may exceed potential output due to cyclical factors, but it cannot do so in the long run.

Which of the Following Statements Is Most Accurate