Suppose the economy's short-run equilibrium level is at a point to the left of Natural Real GDP.Which of the following statements is true?
A) The economy is in an inflationary gap.
B) The economy is in a recessionary gap.
C) The economy is in long-run equilibrium.
D) This situation is actually impossible.

Question

Quizplus · Accepted Answer

If the economy's short-run equilibrium is to the left of Natural Real GDP, it means that the economy is producing below its potential output. This is referred to as a recessionary gap. The economy is not in long-run equilibrium because it is not producing at its potential, and it is not in an inflationary gap because prices are not being pushed up due to excess demand. Therefore, option B is the correct answer. Option D is also incorrect because this situation is possible, and it is referred to as a recession.

Suppose the Economy's Short-Run Equilibrium Level Is at a Point