Why might actual output exceed potential output (an expansionary gap)? Why might actual output be lower...

Why might actual output exceed potential output (an expansionary gap)? Why might actual output be lower than potential output (a recessionary gap)?

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Expert Solution

Expansionary gap arises when there is demand for commodities exceeds its production in the economy. There are various factors due which expansionary gap arises like increase in consumption, reduce in saving rate, increasing in employment, increase in government expenditure and reduction in tax rate. All these factors increase the aggregate demand in the economy due to which aggregate demand shift right ward and causes expansionary gap.

Recessionary gap arises where there is demand for commodities lower than the production in the economy. There are various factors due to which recessionary gap arises like decrease in consumption, increase in saving rate, decrease in employment or increase in unemployment, decrease in government expenditure and increase in tax rate. All these factors decreases the aggregate demand in the economy due to which aggregate demand shift left ward and causes recessionary gap.

Rahul Sunny answered 2 months ago

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