chapter 4 part 4

Question 1

what is the output gap?

Answer 1

the difference between the potential gdp and the real gdp.

Question 2

What is a negative output gap mean?

Answer 2

when the real gdp is below the potential gdp. workers, equipment and materials are not being used at full capacity thus inflation stays steady

Question 3

what is positive output gap mean?

Answer 3

Rea gdp is above potential gdp. lack of workers can cause wage increasing. causing inflation to increase

Question 4

what is demand-pull inflation?

Answer 4

if a theres high demand for a product and a company is able to maintain production above normal capacity they can increase prices.

Question 5

what is cost-push inflation?

Answer 5

if materials start costing more companies can increase prices of product and produce less.

Question 6

what is disinflation?

Answer 6

a decrease in the rate of inflation. prices still go up just slower.

Question 7

what is the theory of the phillips curve?

Answer 7

when unemployment is low, inflation tends to be high.

when unemployment is high, inflation tends to be low.

Question 8

what gauge is used to determine the cost of disinflation?

Answer 8

the sacrifice ratio. it describes how much the gdp must reduce for inflation to drop 1%

Question 9

what is deflation?

Answer 9

The opposite of inflation. cpi drops year and year and buying power increases.