The gap that exists when equilibrium real GDP is less than full-employment real GDP is
A) the short-run aggregate supply curve.
B) money illusion.
C) a recessionary gap.
D) an inflationary gap.

Question

Quizplus · Accepted Answer

A recessionary gap exists when equilibrium real GDP is less than full-employment real GDP, meaning that the economy is producing below its potential and there are unemployed resources. This is often associated with a downturn in the business cycle or a recession. The short-run aggregate supply curve refers to the relationship between the price level and the quantity of output that firms are willing to supply in the short run, while money illusion refers to the tendency for people to interpret nominal changes in wages or prices as real changes. An inflationary gap, on the other hand, exists when equilibrium real GDP is greater than full-employment real GDP, meaning that the economy is producing beyond its potential and there is upward pressure on prices.

The Gap That Exists When Equilibrium Real GDP Is Less