Question

Suppose that a country's economy is operating at an unemployment rate 6% higher than its natural...

Suppose that a country's economy is operating at an unemployment rate 6% higher than its natural rate of unemployment. Then a(n) __________ exists and government should _________.

inflationary gap; increase spending

inflationary gap; decrease spending

recessionary gap; increase spending

recessionary gap; decrease spending

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Answer :

Option c) recessionary gap ; increase spending

When the country's economy is operating at an unemployment rate that is higher than its natural rate of unemployment, that means a lower level of consumer demand due to the fact that more number of people don't have jobs. Which in turn implies lower production level and thus lower GDP and thus causes a recessionary gap.

In order to fill this recessionary gap the government should increase spending so as to boost money into the economy which will then boost consumer demand and thereby production level will increase and in turn will fill the gap.

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