On a TE-TP diagram consider a level of Real GDP at which the vertical distance to the TE line exceeds the vertical distance to the 45-degree line.This level of Real GDP is __________ its equilibrium level,with __________. A) above; TE TP B) above; TE TP D) below; TE

Question

On a TE-TP diagram consider a level of Real GDP at which the vertical distance to the TE line exceeds the vertical distance to the 45-degree line.This level of Real GDP is __________ its equilibrium level,with __________. A) above; TE > TP B) above; TE < TP C) below; TE > TP D) below; TE < TP

Quizplus · Accepted Answer

When the vertical distance to the TE line exceeds the vertical distance to the 45-degree line, it means that planned spending (TE) is greater than actual output (real GDP), leading to an increase in inventories. This signals to producers that they need to increase production, which will eventually bring the economy back to its equilibrium level. Therefore, the actual output (real GDP) is below its equilibrium level. Also, since TE > TP (planned spending is greater than production), it means that there is an unplanned increase in inventories, which is a sign of a recessionary gap. Therefore, the correct choice is C.

On a TE-TP Diagram Consider a Level of Real GDP