If,at the short-run equilibrium,a recessionary gap exists,the
A) IA line will move upward until actual output equals potential output.
B) IA line will move downward until actual output equals potential output.
C) LRAS line will move upward until actual output equals potential output.
D) LRAS line will move downward until actual output equals potential output.
E) LRAS line and IA line will move upward until actual output equals potential output.

Question

Quizplus · Accepted Answer

In a recessionary gap, actual output is below potential output. This means that there is excess capacity in the economy, leading to lower prices and wages. To close the gap, the IA line needs to move downward (through fiscal or monetary policy) to increase aggregate demand and bring actual output closer to potential output. This is because the LRAS line represents the maximum sustainable output in the long run, which is not affected by short-run changes in demand. Therefore, the LRAS line does not need to move in order to close the gap.

If,at the Short-Run Equilibrium,a Recessionary Gap Exists,the