Question

For policymakers the problem with a recessionary gap is _____ and the problem with an expansionary gap is _____.

A. a tendency for inflation to develop; wasted resources B. wasted resources; a tendency for inflation to develop
C. an increase in cyclical unemployment; an increase in structural unemployment
D. an increase in structural unemployment; an increase in cyclical unemployment

Answer 1

The correct answer is option B.

Step-by-step explanation:

A recessionary gap implies that the resources are not being fully utilized. This means resources are being wasted.

An expansionary gap, on the other hand, means that the economy is producing at more than potential level. The price level at this point is high. There is a tendency for inflation to develop in this situation.

To curb the recessionary gap the economy can adopt the expansionary fiscal and monetary policy. While to curb expansionary gap, contractionary monetary and fiscal policy can be adopted.