Sub: Economics Topic: Micro Economics
Question:
Graphical description of a mild recessionary gap using an aggregate
demand/aggregate supply model
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There is much discussion among politicians that we were in a recession. Either way, using either
the aggregate expenditures approach OR the Aggregate Demand/Aggregate Supply model,
draw a graph of a mild recessionary gap.
This is an Aggregate demand-aggregate supply model. A decrease in aggregate demand causes
a recession.
Solution:
According to the official definition of recession , when the real GDP growth falls continuously
for two or more consecutive quarters then only the economy can be declared as in recession.
Recently, the U.S economy was in the fear of recession & it was not declared officially as
recession. However the economy is operating below full employment equilibrium (below
potential output) & it faces a mild recessionary gap. Decline in the aggregate spending is the
major cause for this recessionary gap & it is shown with the help of the following AD / AS
model.
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Sub: Economics Topic: Micro Economics
In the above figure, Y* denotes the full employment or potential output. But the U.S economy
is operating below full employment output at Y. This gap is due to the deficiency in the
aggregate demand & the resulting gap is shown in the above diagram.
** End of the Solution **
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*The Homework solutions from ClassOf1 are intended to help the student understand the approach to solving the problem and not for submitting the same in
lieu of your academic submissions for grades.