If the economy is experiencing a recessionary GDP gap from a demand shock,then aggregate
A)Supply must be increased so that producers can sell more goods.
B)Supply must be decreased so that producers will have fewer goods to sell.
C)Demand must be increased so that producers can sell more goods.
D)Demand must be decreased so that producers will have fewer goods to sell.

Question

Quizplus · Accepted Answer

A recessionary GDP gap indicates that actual output is below potential output, which suggests there is insufficient demand to fully utilize the economy's productive resources. Therefore, in order to close the gap, demand must be increased so that producers can sell more goods and services. This would, in turn, lead to an increase in production and employment, helping to boost the overall economy. Option A is incorrect since increasing supply alone would not necessarily lead to an increase in demand, and may even exacerbate the gap if producers are unable to sell all of their output. Option B is also incorrect, as reducing supply would further depress economic activity, exacerbating the recession. Option D is incorrect since reducing demand would only further depress economic activity, perpetuating the recession.

If the Economy Is Experiencing a Recessionary GDP Gap from a Demand