Question

If potential output for an economy equals $8 billion, and actual output equals $7 billion, then this economy has a(n):

A. trade deficit.
B. recessionary gap.
C. budget deficit.
D. expansionary gap.

Answer 1

If potential output for an economy equals $8 billion, and actual output equals $7 billion, then this economy has a recessionary gap. A recessionary gap occurs when the actual output of an economy is below its potential output. To address a recessionary gap, the policy solution is to shift the aggregate expenditure schedule up by implementing policies like tax cuts or government spending increases.

Step-by-step explanation:

If potential output for an economy equals $8 billion, and actual output equals $7 billion, then this economy has a recessionary gap.

A recessionary gap occurs when the actual output of an economy is below its potential output. In this case, the actual output is $7 billion, which is less than the potential output of $8 billion. This indicates that the economy is not operating at its full capacity and there is a shortfall in production.

To address a recessionary gap, the policy solution is to shift the aggregate expenditure schedule up by implementing policies like tax cuts or government spending increases. This will stimulate spending and increase aggregate demand, leading to an increase in output and closing the gap.