Figure 11.2 shows the relationship between the price level and real GDP. Suppose the economy is initially at point e. A recessionary gap would be created between:

A) Q1 and Q2.
B) Q2 and Q3.
C) Q1 and Q3.
D) AD and AD*.
E) AD* and AD'.

Question

Figure 11.2 shows the relationship between the price level and real GDP. Suppose the economy is initially at point e. A recessionary gap would be created between:

A) Q1 and Q2. 
B) Q2 and Q3. 
C) Q1 and Q3. 
D) AD and AD*. 
E) AD* and AD'.

Quizplus · Accepted Answer

A recessionary gap is a situation where actual output (real GDP) is below potential output. In the given figure, point e is below the potential output (Q2), indicating a recessionary gap. To close this gap, the economy needs to increase output to reach potential output at Q2. Thus, the recessionary gap is between Q2 and Q3, as the economy needs to increase output from e to Q2.

Figure 112 Shows the Relationship Between the Price Level and Real