An economy's AD function is Y = 1000 - 2P and AS function is P = 20 + 0.1Y. If the potential Y is 900, the recessionary gap would be:
A) 200.
B) 100.
C) 50.
D) None of the above.

Question

Quizplus · Accepted Answer

To find the equilibrium output (Y), set AD equal to AS: 1000 - 2P = P = 20 + 0.1Y. Solving these equations gives Y = 800. The potential Y is 900, so the recessionary gap is 900 - 800 = 100.

An Economy's AD Function Is Y = 1000 - 2P