Explain the differences between a recessionary gap and an inflationary gap.
What will be an ideal response?
Both a recessionary gap and an inflationary gap result when equilibrium does not occur at full employment. A recessionary gap exists when equilibrium temporarily occurs at less than the potential output of the economy. In a recessionary gap, the actual real GDP is less than the real GDP at the natural rate. Aggregate demand is insufficient to fully employ all of society’s resources, so unemployment is above the normal rate. An inflationary gap exists when equilibrium is temporarily beyond the potential output of the economy. In an inflationary gap, the actual real GDP is greater than the real GDP at the natural rate. The aggregate demand is so high that the economy temporarily operates beyond full capacity and unemployment is below the normal rate.
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The use of government spending and taxation for the purpose of stabilizing the economy is called __________.
Fill in the blank(s) with the appropriate word(s).
Your grandfather tells you that his annual income increased at an average rate of eight percent over his lifetime. He complains, however, that the average inflation rate of three percent reduced his ability to buy all the things he could have purchased if inflation had been zero. You respectfully tell your grandfather that he is committing the _____, because his annual income would have increased
at an average rate of only five percent if inflation had been zero. Fill in the blank(s) with correct word
The diamond/water paradox helps to illustrate the concept of marginal value.
Answer the following statement true (T) or false (F)
The graph illustrates the market for computers. If the number of buyers of computers increases and technology advances, you predict that the
A) equilibrium price of a computer will fall. B) equilibrium quantity of computers might increase, decrease, or not change. C) equilibrium price of a computer will rise. D) equilibrium quantity of computers will decrease. E) equilibrium quantity of computers will increase.