Chapter 19, Problem 2CYU

To determine

The process by which the economy can move from the recessionary gap.

Explanation of Solution

When the potential output is increased due to an increase in productivity then there would be a rightward shift of the LRAS curve to the new level of potential output. And, if the equilibrium output is lower than the potential output in case of short run, then there would be a recessionary gap and the economy will need to make adjustments to move from this recessionary gap accordingly.

This recessionary gap will cause a decrease in the nominal factor procurement costs, such as the wages of the workers who are hired.

This decrease in turn will increase the supply and due to an increase in the profitability per unit at each level of price, the short-run supply curve would shift to the right.

And, then the potential output and consequent low aggregate level of price would be in tune with the new equilibrium.

Economics Concept Introduction

Introduction: An economy of the country is a system of trade through which wealth is made and used in the country such as consumption and production of goods.

A recessionary gap is experienced by the economy when the economy of the country has lower real GDP than its GDP at the level of full employment and there is a downward shift in the aggregate expenditure line due to recessions and decline in consumption.