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Demonstrate graphically and explain verbally a recessionary gap. Describe two solutions for closing the gap.

Demonstrate graphically and explain verbally a recessionary gap. Describe two solutions for closing the gap.

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Answer #1

A recessionary gap is an economic situation where the economy lies at a point which lies below full employment. The gap shows the real GDP below the full employment level of output. It occurs when an economy is about to reach recession means aggregate demand is low, prices are high and unemployment is high.

The graph below shows the recessionary gap where the aggregate demand curve lies below the full employment level;

The two remedies can be; increasing government spending to induce aggregate demand to rise and output to expand while secondly, expansionary monetary policy implies reducing the cost of borrowing to increase investment demand in the economy and aggregate demand so that output expands to full employment level.

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