Question

Did the US face a recessionary gap or inflationary gap in 2001?

1) Recessionary gap
2) Inflationary gap
3) Both recessionary and inflationary gaps
4) Neither recessionary nor inflationary gap

Answer 1

In 2001, the U.S. experienced a recessionary gap option (1) which is addressed through economic policies such as tax cuts or increased government spending to stimulate demand and move the economy closer to its potential GDP.

Step-by-step explanation:

The United States faced a recessionary gap in 2001, which is option 1 in the question. During times of recession, high levels of unemployment are typical and the total demand for goods falls, leading to a lower inflation rate.

This pattern is evidenced by historical recessions such as the Great Depression and the Great Recession of 2008-2009. Similarly, in 2001, the policy solution to address the recessionary gap would involve shifting the aggregate expenditure schedule up from AE to AE₁, through measures such as tax cuts or government spending increases, moving the economy towards potential GDP.