2.5.2 Output Gaps

Question 1

What is the Output Gaps

Answer 1

is the difference between actual level of GDP and estimated potential level

Expressed as a % of potential

Question 2

What is a positive output gap

Answer 2

Where actual GDP is above potential GDP

signs of excess AD in the economy

Question 3

How would you show a positive output on an AD/AS diagram

Answer 3

equilibrium between SRAS and AD is higher than LRAS

Question 4

What is a negative output gap

Answer 4

where the economy has a large margin of spare capacity of factor resources

Question 5

How would you show a negative output gap on an AD/AS diagram

Answer 5

The equilibrium of SRAS and AD is smaller than LRAS

Question 6

Why is it difficult to assess the size of an output gap

Answer 6

because calculating maximum potential of an economy is extremely difficult

Hard to assess: size of labour force, productivity, business output + confidence and underemployment