During a recession, the economy is producing less output than it is capable of producing, meaning that real GDP is less than potential GDP. This is typically caused by a decrease in demand and/or a decrease in investment, leading to a decrease in production and employment. The gap between real GDP and potential GDP is known as the output gap.

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During a Recession

Question 249

Multiple Choice

During a recession,

A) real GDP is equal to potential GDP.
B) real GDP is less than potential GDP.
C) real GDP is greater than potential GDP.
D) the relationship between real GDP and potential GDP no longer exists.
E) the actual unemployment rate is less than the natural unemployment rate.

Correct Answer: