Output gaps Flashcards
1
Q
A
2
Q
Show a negative output gap using the classical AD/AS model
A
- Equilibrium income is at
Y1, where AD=SRAS. This
is the actual output. - Yfe represents the
economy’s potential
output. - The gap between Y1 and
Yfe is the negative output
gap
3
Q
Show a negative output gap using the Keynesian AD/AS model
A
- Equilibrium income is at Y1, where
AD=SRAS. This is the actual output. - Yfe represents the economy’s
potential output or full employment
income - The gap between Y1 and Yfe is the
negative output gap - An increase in AD to AD2 reduces the
size of the negative output gap
from Y1Yfe to Y2Yfe
4
Q
Show a positive output gap using the classical AD/AS model
A
- Equilibrium income is at Y1, where AD=SRAS. This is the actual output.
- Yfe represents the economy’s potential
output. - The gap between Y1 and Yfe is the positive output gap.
A positive output increases the competition for scarce resources;
wages and other business costs start to rise, SRAS will shift left until the economy returns to Yfe. (Cost-push inflation)
5
Q
Why are there difficulties in measuring the output gap?
A
- It involves determining potential output, which is not directly observable
- It is influenced by evolving factors like technological changes and demographic
shifts - Accurate data on current output levels is often subject to revisions
- Economic uncertainty means it is hard to make precise measurements
6
Q
Explain sustainable growth?
A
- Growth which can continue into the long run
- Growth without using up non-replaceable resources
- No natural resources depletion or degradation (environmentally-friendly)
- Growth which does not compromise future generations
7
Q
Explain inclusive growth
A
- Growth where all citizens experience an increase in their income/living standard
- Income inequality does not cause some groups to miss out on the benefits of
growth - Most economists do not believe that the benefits of growth will ‘trickle down’
from rich to poor without government intervention
