Using the aggregate expenditure-output model, assume the aggregate expenditures (AE) line is below the 45-degree line at full-employment GDP. This vertical distance is called a(n):
A) inflationary gap.
B) recessionary gap.
C) negative GDP gap.
D) marginal propensity to consume gap.

Question

Quizplus · Accepted Answer

A recessionary gap occurs when the actual real GDP is lower than the potential full-employment GDP. This can be seen on the aggregate expenditure-output model when the AE line is below the 45-degree line at full-employment GDP. The vertical distance between the two lines represents the gap or the amount by which actual GDP falls short of potential GDP. Therefore, option B, recessionary gap, is the correct answer. Option A, inflationary gap, describes a situation where the actual output exceeds the potential output, leading to an increase in prices. Option C, negative GDP gap, is not a commonly used term. Option D, marginal propensity to consume (MPC) gap, does not relate to the situation described in the question.

Using the Aggregate Expenditure-Output Model, Assume the Aggregate Expenditures (AE)