Assume equilibrium real GDP per year is equal to full-employment real GDP. Which of the following will cause a recessionary gap?
A) an increase in aggregate demand
B) a reduction in aggregate demand
C) a discovery of a new raw material
D) a temporary reduction in the price of oil

Question

Quizplus · Accepted Answer

A recessionary gap occurs when equilibrium real GDP is below full-employment real GDP. Therefore, a reduction in aggregate demand (Option B) would cause a recessionary gap. Options A, C, and D would increase aggregate demand or decrease production costs, which would either increase equilibrium real GDP or push the economy toward potential output.

Assume Equilibrium Real GDP Per Year Is Equal to Full-Employment