Question

Use the Keynesian model to explain the recessionary gap

Answer 1

(Answer)

Aggregate expenditure line shows the level of Expenditure that is done by the individuals in an economy. In other words, it refers to the amount that individuals are willing to spend on the purchase of goods and services in an economy.
The intersection of the AE line and the 45-degree line signifies the equilibrium in an economy which means that the amount of good that is produced is purchased by the individuals.

Potential GDP is the level of GDP that an economy can produce at full employment level.

As we can see in the below diagram that, E1 is the point of equilibrium which is below the potential GDP level denoted by E2.
This means that the output level that could have been produced is not produced and less amount of input is hired to produce the current level of output which means that there is unemployment prevailing in the economy. This denotes that there is a recession in the economy.
As we can see in the below diagram that the difference between E2 and E1 is the recessionary gap.