Which of the following is true of a recessionary gap?
A)Firms will increase output because Real GDP is below Potential GDP.
B)Firms will decrease output because the price level is low.
C)Firms have no incentive to produce more because they can't sell additional output.
D)Firms have no incentive to produce more because it's very expensive to employ more labour.
E)It is correctly described as "too much money chasing too few goods."

Question

Quizplus · Accepted Answer

In a recessionary gap, Real GDP is below Potential GDP, which means there is a decrease in demand for goods and services. Firms have no incentive to produce more because they can't sell additional output due to decreased demand. This leads to a decrease in employment and output levels. Option A is incorrect because firms will not increase output when there is decreased demand. Option B is incorrect because low price levels do not necessarily lead to a recessionary gap. Option D is incorrect because high labor costs are not the primary reason for a recessionary gap. Option E is incorrect because this is not a precise definition of a recessionary gap.

Which of the Following Is True of a Recessionary Gap