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

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Q: (CDS-I/2021)
The situation where the equilibrium level of real GDP falls short of potential GDP is known as

question_subject: 

Economics

question_exam: 

CDS-I

stats: 

0,81,80,81,60,12,8

keywords: 

{'inflationary gap': [0, 0, 0, 1], 'recessionary gap': [0, 0, 0, 1], 'real gdp': [0, 0, 0, 1], 'potential gdp': [0, 0, 0, 2], 'side inflation': [0, 0, 0, 1], 'equilibrium level': [0, 0, 0, 2], 'demand': [0, 0, 0, 3]}

The correct answer is option 1: Recessionary gap.

A recessionary gap occurs when the equilibrium level of real GDP falls short of potential GDP. Real GDP represents the total value of goods and services produced in an economy, while potential GDP represents the maximum possible level of production an economy can achieve with its available resources.

The existence of a recessionary gap indicates that the economy is not operating at full capacity. This means that there are unemployed resources, such as labor and capital, that are not being utilized efficiently.

A recessionary gap is typically characterized by high unemployment rates and weak consumer spending. It can occur due to various factors such as a decrease in aggregate demand, a decline in investment spending, or a decrease in government expenditure.

In order to close a recessionary gap and return the economy to its potential GDP, government intervention and expansionary fiscal policies, such as increased government spending or tax cuts, may be implemented to stimulate aggregate demand and encourage economic growth.