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Real GDP demanded Real GDP supplied Short run Long run (dollars) (dollars) Price level (dollars) 700 90 300 600 100 600 400 6

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Answer #1

In short run, equilibrium occurs when demand = supply = 500 while on the same price level, long run real GDP is 600. As output in short run is less than output in long run, there occurs a recessionary gap of $600 - $500 = $100.

Option 2 is correct.

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