In the above figure, if the relevant aggregate demand curve is AD 2, what type of gap exists and how large is it? A) inflationary gap of $500 billion B) inflationary gap of $1 trillion C) recessionary gap of $1 trillion D) recessionary gap of $500 billion
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Step 1: Identify the type of gap - If the relevant aggregate demand curve is AD2, and it intersects the potential GDP at a point where the equilibrium output is below the potential GDP, then a recessionary gap exists. Show more…
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