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Unformatted text preview: Jennifer Johnson Kaplan University BU204- 03 Macroeconomics Anthony Brogna Unit 7 November 30, 2010 Potential Output is the level of real GDP the economy would produce if all prices, including nominal wages, were fully flexible (Krugman & Wells, 2009, p. 330). After reading, this weeks information Potential Output is the total gross domestic product (GDP) that could be produced by an economy if all its resources were fully employed. For example, it is the output should there be no unemployment, no spare labor and no spare capital. It is unlikely that actual output will be the same as potential output since there is always unemployment. Excellent! Recessionary gap when aggregate output is below potential output (Krugman & Wells, 2009, p. 340). A recessionary gap occurs when an economy is operating in the short term at a level below the potential full-employment equilibrium level. This means that the gross domestic product being achieved is lower than it would be at the level of full employment, which causes prices within the economy to drop to achieve balance. The presence of a recessionary gap, also known as a contractionarygap, usually means that a recession is near, often caused by a high exchange rate that reduces income from exports. It's usually accompanied by reduced consumer investments due to poor take-home pay and high unemployment. For example, an economy that is producing only $5 million dollars in gross domestic product but could be producing $15...
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