inal answer:
A recessionary gap is the difference between the actual economic output (real GDP or Eo) and the potential GDP of an economy. When this gap exists, it indicates underutilization of resources including high unemployment, as firms are not hiring the full employment number of workers.
Step-by-step explanation:
The concept of a recessionary gap refers to the area where actual economic output is below the potential Gross Domestic Product (GDP) of an economy. When real GDP (also denoted as Eo) is lower than potential GDP, this indicates that the economy is not operating at full efficiency. In such a scenario, there is typically an excess of resources, particularly labor, leading to higher unemployment rates. This is because firms are not producing at their full capacity and thus do not require the full employment number of workers.
The recessionary gap can be illustrated as the distance on a graph where the actual output level falls short of the potential output level. In an attempt to close this gap, policies such as government spending or tax cuts may be utilized to stimulate economic activity and increase actual GDP towards the potential GDP.