When the actual unemployment rate is less than the natural unemployment rate,the economy is in a recessionary gap.

Question

Quizplus · Accepted Answer

When the actual unemployment rate is less than the natural unemployment rate, it means that the economy is operating beyond the full employment level, which is also called the "potential output" or the "natural level of output". Therefore, the economy is not in a recessionary gap but in an inflationary gap, where the aggregate demand is greater than the potential output and inflationary pressures may arise. In contrast, a recessionary gap occurs when the actual output is less than the potential output, which increases the unemployment rate above its natural level.

When the Actual Unemployment Rate Is Less Than the Natural