Question

If the short-run macroeconomic equilibrium occurs with real GDP les than Y*, the economy is

A) in an inflationary gap.
B) operating at full capacity
. C) in a recessionary gap.
D) threatened with an acceleration of inflation
. E) at its full-employment level of output.

Answer 1

If the short-run macroeconomic equilibrium has real GDP less than potential GDP, the economy is in a recessionary gap, not operating at full capacity, with higher unemployment.

Step-by-step explanation:

If the short-run macroeconomic equilibrium occurs with real GDP less than potential GDP (Y*), then the economy is in a recessionary gap. This situation is depicted in a Keynesian cross diagram, where the aggregate expenditure line intersects the 45-degree line below the potential GDP level. In such cases, the economy is not operating at full capacity, and unemployment is higher than normal because firms are not hiring at the full employment level. Policy solutions typically involve attempts to shift the aggregate expenditure line upwards through tax cuts or government spending increases, aiming to restore the equilibrium to the potential GDP level.