Question

At the intersection of national savings and the (I+NCO) curve, what happens?

1) The economy is in equilibrium
2) The economy is in recession
3) The economy is experiencing inflation
4) The economy is experiencing deflation

Answer 1

In a Keynesian cross diagram, the equilibrium may be at a level below potential GDP, which is a recessionary gap, or at a level above potential GDP, which is an inflationary gap.

Step-by-step explanation:

In a Keynesian cross diagram, the equilibrium occurs where aggregate expenditure is equal to national income. If the equilibrium is at a level below potential GDP, it is called a recessionary gap. This means that the economy is not operating at its full productive capacity, resulting in unemployment and low economic output. On the other hand, if the equilibrium is at a level above potential GDP, it is called an inflationary gap. This indicates that the economy is producing more than its sustainable level, leading to inflationary pressure.