Output Gaps

Question 1

What are positive output gaps?

Answer 1

This is where actual levels of output is greater than potential. Also known as an inflationary gap.

LRAS will be before AD and SRAS equilibrium
Can also be shown on Keynasian

Question 2

What are negative output gaps?

Answer 2

This is where actual levels of output is less than potential. Also known as a deflationary or recessionary gap.

LRAS will be after AD and SRAS equilibrium
Can also be shown Keynasian

Question 3

Output gap evaluation between price level and AD

Answer 3

For keynasian, if we are in a huge - output gap and AD shifts right, then yes theres growth but the price level may be the same as shown on the keynasian graph.

However, if AD shifts very close to YFE, then price levels increasing causing a conflict between macroeconomic objectives.

Question 4

Output gap evaluation between price level and LRAS

Answer 4

When LRAS shifts right we assume theres an increase in actual growth and potential growth. There will be a fall in unemployment, cost push inflation and more.

However, if theres a huge neg output gap, AD is very low. The shift in LRAS will be pointless as there may not be enough AD to match the price level. Therefore, price stays the same.