The figure below shows the determination of the equilibrium price level and real GDP in an aggregate demand-aggregate supply model. If the economy is at point H, there is a(n):

A) expansionary gap of $300 billion.
B) recessionary gap of $300 billion.
C) recessionary gap of $10 billion.
D) expansionary gap of $20 billion.
E) expansionary gap of $10 billion.

Question

The figure below shows the determination of the equilibrium price level and real GDP in an aggregate demand-aggregate supply model. If the economy is at point H, there is a(n):

A) expansionary gap of $300 billion. 
B) recessionary gap of $300 billion. 
C) recessionary gap of $10 billion. 
D) expansionary gap of $20 billion. 
E) expansionary gap of $10 billion.

Quizplus · Accepted Answer

Point H in the diagram is below the potential output (Yp) level, which means that real GDP is below the level that the economy can produce in the long run. In other words, there is a recessionary gap. The size of the gap can be measured by the difference between the potential output level (Yp) and the actual output level at point H ($500 billion). Thus, the recessionary gap is $300 billion.

The Figure Below Shows the Determination of the Equilibrium Price