Which of the following is true of a recessionary gap?
A) It develops when the expected price level is less than the actual price level.
B) In the long run, this gap closes when resource suppliers negotiate lower resource payments.
C) It measures the amount by which actual output is greater than an economy's potential output.
D) In the long run, this gap closes when the short-run aggregate supply curve shifts leftward.
E) In the long run, this gap closes when the aggregate demand curve shifts rightward.

Question

Quizplus · Accepted Answer

A recessionary gap occurs when the actual output of an economy is less than its potential output. This means that there is a negative GDP gap (Y < Y*) and unemployment is higher than the natural rate. In the long run, the recessionary gap can be closed through adjustments in resource payments. If resource suppliers negotiate lower payments, this will reduce costs for firms and result in a rightward shift of the short-run aggregate supply curve. As a result, output will increase and the economy will move closer to its potential output level.

Which of the Following Is True of a Recessionary Gap