Output Gaps [2.5.2] Flashcards
(8 cards)
What is the output gap?
The output gap is the difference between the actual level of GDP and its estimated potential level.
The output gap is usually measured as a % of the level of output gap and is linked to the economic cycle
What does this diagram show?
The output gap economic cycle during a recession high output gap not working near maximum capacity in boom working close to maximum potential.
What does this diagram show?
Negative output gap. LRAS curve shows the maximum capacity. SRAS shows economic output in the short term. Potential output gap is negative.
What is a negative output gap?
Negative output gap refers to a situation where an economy’s actual output or real GDP is below potential national output.
Potential output represents the level of production an economy can achieve when all resources are fully employed without causing inflationary pressure.
When actual output falls below this potential level results in negative output gap. Often corresponds with higher unemployment and under-utilized resources.
What does a inward shift in AD occur during a negative output gap?
Populations falls less AD or a rise in interest rates. This fall in demand lowers the need to supply employment due to less consumption.
What is a positive output gap?
Positive output gaps refer to a situation in an economy when economy’s actual output or real GDP is higher than its potential output.
potential output represents the level of production an economy can sustainably achieve when all available resources are fully utilized without causing inflationary pressure when output surpasses potential leads to positive output gap rise in demand pull and cost push inflation.
What does a positive output diagram look like?
AD shifts to the right maybe due to a rise in population this brings the economy close to full capacity more demand shifts greater need for supply higher prices.
What are the implications of a positive output gap on SRAS?
Positive output gaps causes resources to become scarce. Wages build up other costs rise. Shifting supply inwards.
