(B is only checked as a guess) Scenario The current equilibrium output of an eco

Question

(B is only checked as a guess)

Scenario The current equilibrium output of an economy is $18 billion. The marginal propensity to consume (MPC) is 0.8. Full employment output is $23 billion. There is an aggregate demand shortfall of $8 billion. Which of the following describes this economy? Select one O A. It has a recessionary gap equal to $5 billion. O B. It has an inflationary gap equal to $5 billion O C. It has a recessionary gap equal to $8 billion O D. It has an inflationary gap equal to $8 billion

Explanation / Answer

Option A.

Explanation: Recessionary gap takes places when the actual output is lower than the potential output. Here, actual output is $18 billion and potential output is $23 billion (the full employment output). So, recessionary gap = potential output - current output = $23 billion - $18 billion = $5 billion.

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