When real GDP is less than potential GDP, there is ________ which leads the unemployment rate to ________.
A) an inflationary gap; rise
B) a recessionary gap; decline
C) a recessionary gap; remain at the natural level
D) an inflationary gap; remain at the natural level
E) a recessionary gap; rise

Question

Quizplus · Accepted Answer

When real GDP is less than potential GDP, it indicates a recessionary gap, which implies that there is a shortfall in aggregate demand. As a result, firms cannot sell all of their output, and they cut back on production and employment. This leads to an increase in unemployment rates, as more people are out of work due to the reduction in output. Therefore, the answer is E, a recessionary gap leads to a rise in the unemployment rate.

When Real GDP Is Less Than Potential GDP, There Is