When an economy's output is below its potential output, the gap is known as a recessionary gap. This indicates that the economy is underperforming and not utilizing its resources efficiently, leading to higher unemployment and lower levels of production than what could be achieved at full capacity. Conversely, if an economy's output exceeds its potential output, it may create an inflationary gap, leading to upward pressure on prices.
When an economy's output is than its potential output, the gap is known as a recessionary gap.
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