All recessions are result of output gaps. True or False? Explain properly.

All recessions are result of output gaps.
True or False? Explain properly.

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Expert Solution

This statement is false. An output gap is defined as the difference between the actual output of the economy and the maximum efficiency output for the economy. This output, commonly known as potential GDP, is very difficult to accurately calculate. It is however believed to be the GDP at full employment level.

A country's output gap can be positive or negative. This is why we cannot say for certain that an output gap may result in recession. Any output gap is generally considered to be an irritant for the economy. If the output gap is positive, it means that the demand for goods and services in the economy is very high. So people must work beyond their maximum efficiencies to satisfy that demand. This invariably results in high inflation. A negative output gap means that the economy is operating below its maximum efficiency and the demand for goods and services is sluggish. A negative output gap results in recession.

Rahul Sunny answered 4 weeks ago

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