Question

An economy producing below potential output is considered to be operating in a(n) ______ gap.

-expansionary
-recessionary
-concessionary
-inflationary

Answer 1

When an economy is producing below potential output, it is considered to be operating in a recessionary gap. This means that the equilibrium level of real GDP is below potential GDP, resulting in high unemployment.

Step-by-step explanation:

In a Keynesian cross diagram, when an economy is producing below potential output, it is considered to be operating in a recessionary gap. A recessionary gap occurs when the equilibrium level of real GDP is below potential GDP, resulting in high unemployment. Firms are not willing to hire the full employment number of workers due to the low equilibrium level of real GDP.