Question

Is the difference between the equilibrium gdp and potential gdp referred to as a gdp gap or recessionary gap?

Also, interest rates spread between long-term and short-term treasury bills

a.) are lagging indicators

b.) are good predictors of recession

c.) are countercylical

d.) all of the above

Answer 1

ans 1

Potential GDP is total output produced by an economy by employing all resources of the economy whereas equilibrium GDP refers to output determined where Aggregate supply is equal to Aggregate Demand

When Potential GDP > Equilibrium GDP , which means country has more potential to produce than it actually producing. It means AD< Potential level of AS , therefore recessionary gap or GDP gap exists

when Equilibrium GDP > potential, which means country is straining over the available resources and overexpoliting the resources and producing more than full capacity because AD> full employment AS. therefore this generates inflationary gap

ans 2

are lagging indicators

long term follows short term but they are laaging in magnitude