A recessionary gap
A) exists when actual spending is greater than its potential.
B) means that equilibrium total real output is below potential output.
C) measures the decrease in total real output needed to achieve price stability.
D) indicates the extent of the recession needed to raise the rate of inflation.
E) can be eliminated by fiscal policies designed to shift the C + I + G + (X - MI) line downward.

Question

Quizplus · Accepted Answer

A recessionary gap occurs when the equilibrium level of real output is below the potential output level, meaning that the economy is operating below its full capacity. This can lead to unemployment and a decrease in GDP. Fiscal policies can be used to shift the aggregate expenditure line downward and close the gap.

A Recessionary Gap