Question

Suppose that the central bank finds that the economy is operating as depicted in the accompanying macroeconomy graph. In the graph, the economy is in a: a) Recession b) Boom c) Expansion d) Contraction

Answer 1

In the graph, the economy is in a a) Recession

How is the economy in a recession ?

In macroeconomics, the short-term equilibrium represents the current state of an economy, while the long-term equilibrium represents the economy's potential or full capacity.

A recession occurs when the economy is operating below its potential or long-term equilibrium. This means that the actual output of goods and services in the short term is less than what the economy is capable of producing in the long term.

During a recession, the actual output (short-term equilibrium) falls below the potential or long-term output level. This means that the economy is underperforming, and there is a gap between the current level of economic activity and what it could achieve in the long run.