Final answer:
A negative output gap, or recessionary gap, is when the actual GDP is lower than the potential GDP of an economy, leading to high unemployment due to insufficient aggregate demand.
Step-by-step explanation:
A negative output gap, also known as a recessionary gap, occurs in the context of an economy's aggregate output. This gap exists when the actual gross domestic product (GDP) is lower than the potential GDP at full employment.
An example of this is when the aggregate expenditure line intersects the 45-degree line in a Keynesian cross diagram at a point below the potential GDP level, indicating the economy is not producing at its full capacity, leading to higher unemployment.
For instance, if the real GDP is $6,000 and the potential GDP is $7,000, the economy is underperforming by $1,000, which is the negative output or recessionary gap. This gap results in firms not hiring the full employment number of workers due to insufficient aggregate demand, thus contributing to high unemployment rates.
Illustration of a Recessionary Gap
An aggregate expenditure-output diagram can demonstrate a recessionary gap. In the diagram, the intersection of the aggregate expenditure line with the 45-degree line reflects the current output.
If this intersection point, represented as Eo, lies below the line level corresponding to potential GDP, a recessionary gap is present. This indicates that the economy is not operating at full efficiency and is experiencing a shortfall in demand.