Where Is a Recessionary Gap?

A recessionary gap, or contractionary gap, occurs when a country's real GDP is lower than its GDP at full employment. Recessionary gaps close when real wages return to equilibrium, and the quantity of labor demanded equals the quantity supplied.

What is a recessionary gap and how do you fix it?

Fiscal policy means using either taxes or government spending to stabilize the economy. Expansionary fiscal policy can close recessionary gaps (using either decreased taxes or increased spending) and contractionary fiscal policy can close inflationary gaps (using either increased taxes or decreased spending).

Is a recessionary gap the same as a recession?

Generally, a recessionary gap occurs when an economy is approaching recession. So it is also associated with business cycle contraction. Recession is a slowdown or a massive contraction in economic activities. A significant fall in spending generally leads to a recession.