ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -If current real GDP is less than full employment output, an economy is in a recession.

Detailed explanation-2: -When an economy is currently below its long-run, full-employment real GDP level, there will be economic unemployment of resources, which will lead to an economic recession.

Detailed explanation-3: -Definition. A recessionary gap is the difference between the amount of goods and services produced at full employment and during a recession when employment is lower.

Detailed explanation-4: -What might cause a recessionary gap? Anything that shifts the aggregate expenditure line down is a potential cause of recession, including a decline in consumption, a rise in savings, a fall in investment, a drop in government spending or a rise in taxes, or a fall in exports or a rise in imports.

Detailed explanation-5: -In the long run, as prices and nominal wages decrease, the short-run aggregate supply curve moves back to SRAS 1 and real GDP returns to potential. As a result, the price level rises to P 2 and real GDP falls to Y 2. The economy now has a recessionary gap equal to the difference between Y P and Y 2.