Output Gaps

Question 1

What are output gaps?

Answer 1

The difference between the long-term trend rate of growth and fluctuations in real GDP.

Question 2

What is a negative output gap?

Answer 2

When actual output in an economy falls below the trend output. This may occur during a recession when the economy is underperforming due to a fall in AD.

Question 3

What are the characteristics of a negative output gap (4)?

Answer 3

1) High unemployment rates.
2) Downward pressure of inflation.
3) Low business and consumer confidence.
4) Underutilised resources.

Question 4

What is a positive output gap?

Answer 4

When actual output in an economy is greater than the trend output. This may occur during an economic boom. An economy can perform above it’s productive potential for a period of time when the factors of production are being over used.

Question 5

What are the characteristics of a positive output gap (4)?

Answer 5

1) Over-utilised resources.
2) Upwards inflationary pressure.
3) Low unemployment rates.
4) High business and consumer confidence.