Suppose an economy is operating with a recessionary gap. In this case, policymakers would seek to move the economy
A) back down the Phillips curve toward an unemployment rate that is closer to the natural rate of unemployment.
B) up the Phillips curve toward an unemployment rate that is closer to the natural rate of unemployment.
C) back down the Phillips curve toward an unemployment rate that is further from the natural rate of unemployment.
D) up the Phillips curve toward an unemployment rate that is further from the natural rate of unemployment.

Question

Quizplus · Accepted Answer

A recessionary gap is a situation where the actual output of an economy is less than its potential output. This implies that there is a high level of unemployment in the economy. To address the recessionary gap, policymakers would seek to increase aggregate demand in the economy through monetary or fiscal policy. This would lead to an increase in output and a decrease in unemployment, moving the economy up the Phillips curve toward an unemployment rate that is closer to the natural rate of unemployment. Therefore, choice B is the best answer.

Suppose an Economy Is Operating with a Recessionary Gap