What characterizes a recessionary gap?

A recessionary gap is characterized by actual GDP being lower than potential GDP. This situation occurs when the economy is not operating at full capacity, which typically happens during periods of economic downturn or recession. In a recessionary gap, resources such as labor and capital are underutilized, leading to increased unemployment and reduced output compared to what the economy could achieve under optimal conditions.

In contrast, when actual GDP is equal to potential GDP, the economy is said to be operating at full employment, with no recessionary gap present. High inflation rates do not characterize a recessionary gap, as inflation is often associated with an overheated economy rather than one that is contracting. Lastly, excessive production and employment would indicate a booming economy, which is opposite the conditions of a recessionary gap. Thus, the defining feature of a recessionary gap is clearly that actual GDP falls short of its potential, reflecting underperformance in the economy.