What is a recessionary gap?

A recessionary gap refers to a time period where an economy functions at less than full employment balance. At this point the gross domestic product is lower than normal, leading to lower overall resource prices in the long term.

A recessionary gap occurs when a recession begins, caused by factors such as reduced consumer purchasing due to less take-home income. The major issue resulting from a recessionary gap is widespread unemployment, leading to less overall production throughout the economy. To address this problem, government officials often institute new fiscal policies that eventually lead to the expansion of employment opportunities and a financial upswing throughout the economy.