Figure 9-4

In Figure 9-4, if the economy is in a recessionary gap, what must happen to reach potential GDP?

Question

Figure 9-4

In Figure 9-4, if the economy is in a recessionary gap, what must happen to reach potential GDP?

Quizplus · Accepted Answer

To reach potential GDP in a recessionary gap, the expenditure level must rise and/or the price level must fall. This is because in a recessionary gap, the economy is producing below its potential level, which means there is excess capacity in the economy. Increasing expenditure will help to utilize this excess capacity and increase production towards potential GDP. Lowering the price level will also help to stimulate demand and increase expenditure, leading to an increase in production towards potential GDP.

Figure 9-4 In Figure 9-4, If the Economy Is in a Recessionary