The situation where the equilibrium level of real GDP falls short of p

The situation where the equilibrium level of real GDP falls short of potential GDP is known as

[amp_mcq option1=”Recessionary gap” option2=”Inflationary gap” option3=”Demand-side inflation” option4=”Supply-side inflation” correct=”option1″]

This question was previously asked in

UPSC CDS-1 – 2021

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The correct answer is A) Recessionary gap.

A recessionary gap occurs when the equilibrium level of real GDP is below the potential GDP. This indicates that the economy is operating below its full capacity, often leading to unemployment.

Potential GDP represents the maximum sustainable output an economy can produce without triggering inflation. An inflationary gap, conversely, occurs when equilibrium real GDP exceeds potential GDP, leading to upward pressure on prices. Demand-side and Supply-side inflation refer to the causes of inflation, not the gap between actual and potential output.

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