When a recessionary gap exists,actual output _________ potential output and the rate of inflation will tend to __________.
A) is greater than;increase
B) is greater than;decrease
C) equals;remain the same
D) is less than;increase
E) is less than;decrease

Question

Quizplus · Accepted Answer

When a recessionary gap exists, actual output (which is lower) is less than potential output, meaning that there is unused capacity in the economy. In this situation, there is less competition for resources, meaning that prices are likely to decrease rather than increase. Therefore, the rate of inflation will tend to decrease, not increase.

When a Recessionary Gap Exists,actual Output _________ Potential Output and the Rate