A recessionary output gap is characterized by
A)rising prices.
B)real GDP falling below potential output.
C)constant prices.
D)real GDP exceeding potential output.
E)real output that varies one- for- one with aggregate demand.

Question

Quizplus · Accepted Answer

A recessionary output gap occurs when actual real GDP is lower than potential output, indicating a downturn in the economy. This is associated with high unemployment and low production levels, so rising prices (A) would not be expected. Constant prices (C) may occur, but do not characterize a recessionary output gap. Real GDP exceeding potential output (D) indicates an inflationary output gap, which is the opposite of a recessionary output gap. Real output that varies one-for-one with aggregate demand (E) is known as the Keynesian short-run aggregate supply curve, which is not directly related to the concept of an output gap.

A Recessionary Output Gap Is Characterized by