Assume an economy is currently in equilibrium with Real GDP at $1,627 billion.If potential Real GDP (LAS)is $1,800 billion,which of the following is true?
A)There is a recessionary gap of 173 percent.
B)There is an inflationary gap of 173 percent.
C)There is a recessionary gap of $173 billion.
D)There is an inflationary gap of $173 billion.

Question

Quizplus · Accepted Answer

A recessionary gap exists when actual Real GDP is below potential Real GDP. In this case, potential Real GDP is $1,800 billion and actual Real GDP is $1,627 billion, indicating there is a shortfall of $173 billion. Therefore, the correct answer is C - there is a recessionary gap of $173 billion.

Assume an Economy Is Currently in Equilibrium with Real GDP