Question

If the output gap equals -3.2 percent, then:

A. potential GDP is lower than actual GDP.

B. cyclical unemployment equals the sum of structural and frictional unemployment.

C. there is no cyclical unemployment.

D. there is a recessionary gap.

Answer 1

The correct answer to the student's question is that there is a recessionary gap, making option D the accurate choice.

Step-by-step explanation:

When an economy has an output gap of -3.2 percent, it indicates that the actual GDP is below the potential GDP. This situation is characterized as a recessionary gap, where the aggregate expenditure is not sufficient to reach the economy’s full employment level, causing high levels of unemployment.

Cyclical unemployment becomes evident in such scenarios due to business cycle fluctuations; hence, there is an increased number of people without jobs as firms have less incentive to hire because they are producing below their capacity. However, it should be noted that cyclical unemployment is separate from the sum of frictional and structural unemployment, which compose the natural rate of unemployment.