Which of the following occurs if an economy experiences a recessionary gap?I. Actual real GDP is less than potential output.II. Actual real GDP is greater than potential output.III. Unemployment is less than the natural rate.IV. Unemployment is greater than the natural rate.

Question

BlackTom AI · Accepted Answer

Let’s unpack what a recessionary gap means in macroeconomics and then evaluate each option against that concept.
Option a: I and IV only. This pair asserts that actual real GDP is less than potential output (I) and that unemployment is greater than the natural rate (IV). In a recessionary gap, the economy operates below its potential output, so actual GDP < potential GDP is true. When GDP falls below potential, not all workers are fully utilized, so unemployment rises above the natural rate, making IV true as well. Therefore, this combination aligns with a recessionary gap.
Option b: II and III only. II states that actual GDP is greater than potential output, which would correspond to an inflationary (boom) gap, not a recessionary gap. III says unemployment is less than the natural rate, which would also contradict recession conditions (unemployment tends to be at or above the natural rate when GDP is at or below potential). Both statements are inconsistent with a recessionary gap, so this option is incorrect.
Option c: I and III only. I is correct for a recessionary gap, but III claims unemployment is less than the natural rate, which would occur in an expanding economy with GDP above potential or in full employment circumstances. Since a recessionary gap implies higher unemployment, III is false, making this option incorrect.
Option d: II and IV only. II is the claim that GDP exceeds potential output, which describes an inflationary gap, not a recessionary one. IV is correct for a recessionary gap, but because II is incorrect for this scenario, this option does not fit.
Option e: II only. As noted, II describes an economy producing above its potential, which is not a recessionary gap. Since only II is listed and it is inaccurate for a recession, this option is incorrect.
In summary, option a correctly pairs the hallmark features of a recessionary gap (GDP below potential and unemployment above the natural rate) and the other options mix in statements that describe opposite or inconsistent conditions.

Which of the following occurs if an economy experiences a recessionary gap?I. Actual real GDP is less than potential output.II. Actual real GDP is greater than potential output.III. Unemployment is less than the natural rate.IV. Unemployment is greater than the natural rate.Single choice

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