Chapter 4R, Problem 17MCQ

To determine

Factor that signifies a recessionary gap in the economy.

Explanation of Solution

A recessionary gap causes a high level of unemployment as the economy continues to produce lower levels of output than its potential.

Graphically,

  

Therefore, option (c) is the correct answer.

Potential output lower than actual output shows the expansionary gap, not the recessionary gap. Thus, option (a) is incorrect.

Aggregate demand lower than the aggregate supply is an excess supply condition, not a recessionary gap. Thus, option (b) is incorrect.

A recessionary gap always puts downward pressure on prices in the long run and not upward pressure. Hence, the aggregate price level cannot rise. Thus, option (d) is incorrect.

During a recessionary gap, government and monetary institutions need to take some steps to correct and it is not a self-adjusting process. Thus, option (e) is incorrect.

Economics Concept Introduction

When a nation's real GDP is lower than its GDP at full employment, a recessionary gap occurs. When real wages reach equilibrium and the amount of labor required and supplied are equal, recessionary gaps close.