If the economy is experiencing a recessionary GDP gap from a negative demand shock,then aggregate
A)Supply must be increased to curtail the ensuing inflation
B)Supply must be decreased so that producers will have fewer goods to sell.
C)Demand must be increased so that producers can sell more goods.
D)Demand must be decreased further to adjust to the new,lower natural rate of employment.

Question

Quizplus · Accepted Answer

A recessionary GDP gap indicates that the current level of aggregate demand is lower than the potential output level. To close this gap and return to full employment, demand must be increased so that producers can sell more goods and eventually increase supply to meet the higher level of demand. Increasing supply to curtail the ensuing inflation is not appropriate in this scenario as there is already a shortfall in demand. Decreasing supply would also not help, as it would reduce the availability of goods, leading to further economic decline. Demand should not be decreased further as this would only worsen the recessionary GDP gap.

If the Economy Is Experiencing a Recessionary GDP Gap from a Negative