Assume an economy is currently in equilibrium with Real GDP at $500 billion.If potential Real GDP (LAS)is $600 billion,which of the following is true?
A)There is a recessionary gap of 100 percent.
B)There is a recessionary gap of $100 billion.
C)There is an inflationary gap of $100 billion.
D)There is an inflationary gap of 100 percent.

Question

Quizplus · Accepted Answer

Potential Real GDP (LAS) shows the maximum amount of output an economy can produce without any inflationary pressure. In this scenario, the Real GDP is $500 billion, which is less than the potential Real GDP of $600 billion. This indicates that there is a recessionary gap of $100 billion, as the economy is producing less than its potential.

Assume an Economy Is Currently in Equilibrium with Real GDP