Final answer:
The term 'recessionary gap' refers to the shortfall between an economy's current level of GDP and its potential GDP, which results in underutilized resources and high unemployment.
Step-by-step explanation:
The area between an output level like Eo that is below potential GDP and the level of potential GDP is referred to as a recessionary gap. When the economy is at this lower level of real GDP, it implies that not all resources, especially labor, are being utilized effectively.
As a result, firms do not have the incentive or need to hire the full employment number of workers, leading to higher unemployment rates. This situation reflects an economy that is not operating at its full potential, often due to decreased demand or other economic shocks that have led to a decline in production and hiring.
The area between the nominal level and distortion is referred to as the recessionary gap. It represents the difference between the actual output level of an economy and the potential output level, which is the maximum output an economy can achieve at full employment.
During a recessionary gap, the equilibrium level of real GDP is below the potential GDP. This leads to a situation where firms are not willing to hire the full employment number of workers, resulting in high unemployment.