-Refer to Figure 7.6. All figures are in billions of dollars. If the potential GDP is $600 billion while the actual GDP is $400 billion, the reduction in the budget balance caused by recessionary gap is:

Question

Quizplus · Accepted Answer

The reduction in the budget balance caused by recessionary gap is equal to the difference between potential GDP and actual GDP, which is $600 billion - $400 billion = $200 billion. However, the question asks for the reduction in the budget balance, which is a negative number. Therefore, the answer is -$200 billion, or $20 billion.