A recessionary gap and an inflationary gap will not persist when the equilibrium level of GDP

Question

Quizplus · Accepted Answer

A recessionary gap occurs when the actual level of GDP is below the potential level of output, leading to unemployment and unused resources. An inflationary gap occurs when the actual level of GDP exceeds the potential level of output, leading to price increases and a potential increase in inflation. Both gaps will not persist when the equilibrium level of GDP is equal to potential output, meaning that all resources are being efficiently utilized and there is no excess demand or supply in the economy. Therefore, choice C is the correct answer.

A Recessionary Gap and an Inflationary Gap Will Not Persist