Question

In the Keynesian cross diagram, what term describes the gap between an output level below potential GDP and the level of potential GDP?

a) Expenditure-output
b) Inflationary gap
c) Recessionary gap
d) National income (Y)

Answer 1

The term used in the Keynesian cross diagram to describe the gap between an output level below potential GDP and the level of potential GDP is called a recessionary gap.

Step-by-step explanation:

In the Keynesian cross diagram, the term that describes the gap between an output level below potential GDP and the level of potential GDP is known as a recessionary gap. When the equilibrium output is less than the potential GDP, it indicates that the economy is not utilizing its full capacity, which may lead to unemployment and underproduction.

On the other hand, if the aggregate expenditure schedule intersects the 45-degree line above potential GDP, the resulting gap is known as an inflationary gap, suggesting the economy is producing beyond its sustainable capacity, which can lead to inflationary pressures.