2.5.2 - Output Gaps

Question 1

When Do Output Gaps Occur?

Answer 1

When the actual level of output is different from the potential level of output.

Question 2

When Does A Negative Output Gap Occur?
(2 Points)

Answer 2

~ Anytime where actual output is less than the potential level of output.

~ Also known as a deflationary gap and a recessionary gap.

Question 3

What Will A Negative Output Gap Look Like On A Classical Model?

Answer 3

Question 4

What Will A Negative Output Gap Look Like On A Keynesian Model?

Answer 4

Question 5

When Does A Positive Output Gap Occur?
(2 Points)

Answer 5

~ Anytime where the actual level of output is greater than the potential level of output.

~ Also known as an inflationary gap.

Question 6

What Will A Positive Output Gap Look Like On A Classical Model?

Answer 6

From YFE -> Y1 is possible use of labour unsustainably.

Question 7

What Will A Positive Output Gap Look Like On A Keynesian Model?

Answer 7

Question 8

Why Is It Difficult To Measure Output Gaps?
(3 Points)

Answer 8

~ Hard to know exactly what the maximum productive potential of the economy is.

~ Rapidly rising prices can indicate a positive gap is developing.

~ Rising unemployment and slowdown in economic growth can indicate that the negative output gap is increasing.