Figure 7-4 -Refer to Figure 7-4. Which of the following statements is true? A) The economy depicted in the figure experiences a recessionary gap = Y_p*Y₁. B) The economy depicted in the figure experiences a recessionary gap = Y_p*Y₂. C) The economy depicted in the figure experiences a recessionary gap = Y₂*Y₁. D) The economy depicted in the figure is in long-run equilibrium but not in short-run equilibrium.

Question

Quizplus · Accepted Answer

The economy is in a recessionary gap, which is represented by the distance between the potential GDP line (YS) and the current GDP (U1B0). This distance is also equal to the distance between the 45-degree line and the aggregate expenditure (F1F1F1) at U1B0. The correct equation for the recessionary gap is therefore:

Recessionary gap = YS1U1B1 – F1F1F1S1

In the figure, YS1U1B1 is the distance between the potential GDP line and the equilibrium level of output (U1B1). F1F1F1S1 is the distance between the 45-degree line and the aggregate expenditure at U1B1. Therefore, the correct equation can be rewritten as:

Recessionary gap = YS1U1B1 – (F1F1F1S1 – F1F1F1S1U1B1)

Substituting the values from the figure, we get:

Recessionary gap = 12 – (16 – 13) = 9

This shows that the recessionary gap is equal to 9 units of output, which corresponds to the vertical distance between U1B0 and YS. The correct answer is thus (B).

Figure 7-4 -Refer to Figure 7-4. Which of the Following Statements Is