If potential output exceeds actual output, the economy:
A)is experiencing an inflationary gap.
B)is experiencing a recessionary gap.
C)may be in a long-run equilibrium but is not in a short-run equilibrium.
D)is in neither a short-run nor long-run equilibrium.

Question

Quizplus · Accepted Answer

When potential output exceeds actual output, it means the economy is not producing as much as it could, which is indicative of a recessionary gap. This situation occurs when there is insufficient demand to purchase all the goods and services that could be produced at full employment, leading to unemployment and underutilized resources.

If Potential Output Exceeds Actual Output, the Economy