Figure 16-3
Panel (a) Panel (b) Suppose the level of potential output (Y P ) is $1,000 billion and the natural rate of unemployment is 5%. In Panel (a), the aggregate demand curve in Period 1 is AD 1 . Assume that the price level in Period 1 has risen by 1.5% from the previous period and the unemployment rate is 10%. Thus, in Panel (b) point F shows an initial rate of inflation of 1.5% and an unemployment rate of 10%. Similarly, point b in Panel (a) corresponds to point G in Panel (b) and point d in Panel (a) corresponds to point H in Panel (b).
-Refer to Figure 16-3. If the economy were experiencing a recessionary gap, it would be Joperating at
A) point a only.
B) point b only.
C) either point a or point b.
D) point d only.

Question

Figure 16-3
Panel (a) Panel (b)   Suppose the level of potential output (Y P ) is $1,000 billion and the natural rate of unemployment is 5%. In Panel (a), the aggregate demand curve in Period 1 is AD 1 . Assume that the price level in Period 1 has risen by 1.5% from the previous period and the unemployment rate is 10%. Thus, in Panel (b) point F shows an initial rate of inflation of 1.5% and an unemployment rate of 10%. Similarly, point b in Panel (a) corresponds to point G in Panel (b) and point d in Panel (a) corresponds to point H in Panel (b).
-Refer to Figure 16-3. If the economy were experiencing a recessionary gap, it would be Joperating at
A) point a only. 
B) point b only. 
C) either point a or point b. 
D) point d only.

Quizplus · Accepted Answer

A recessionary gap occurs when the actual output is below potential output. In Panel (a), point a represents a level of output below potential output (Y_P), while in Panel (b), point F corresponds to a higher inflation rate (1.5%) and a higher unemployment rate (10%) due to the recessionary gap. Similarly, in Panel (a), point b also represents a level of output below potential output, while in Panel (b), point G corresponds to a higher inflation rate (3%) and a lower unemployment rate (8%) due to the expansionary gap. Therefore, the economy would be operating at either point a or point b if it were experiencing a recessionary gap. Point d in Panel (a) corresponds to point H in Panel (b), which represents a level of output above potential output, indicating an expansionary gap.