If equilibrium level of real Gross Domestic Product (GDP) is less than the full-employment real Gross Domestic Product (GDP) consistent with the position of the economy's long-run aggregate supply (LRAS) curve, then the difference between full-employment real Gross Domestic Product (GDP) and current equilibrium real Gross Domestic Product (GDP) is
A) an aggregate demand shock.
B) an aggregate supply shock.
C) a recessionary gap.
D) an inflationary gap.

Question

Quizplus · Accepted Answer

The difference between the full-employment real GDP and equilibrium real GDP is called the output gap. If the equilibrium level of real GDP is less than the full-employment level, it means that the economy is producing below its potential. This situation is known as a recessionary gap, where there is a shortfall in aggregate demand compared to the economy's potential output level. Therefore, option C is the correct choice. Option A (an aggregate demand shock) and option D (an inflationary gap) are not appropriate answers as they don't reflect the given scenario. Option B (aggregate supply shock) can be ruled out because the economy is not at the LRAS level, which is the potential output level.

If Equilibrium Level of Real Gross Domestic Product (GDP) Is