Lesson 21 - Output Gap Continued

Question 1

What does the Output Gap suggest about efficiency/productivity?

Answer 1

Positive correlation
Positive = High E/P
Negative = Low E/P

Question 2

How does a positive gap influence inflation?

Answer 2

Wholesale rise due to AD
Generally demand pull

Question 3

How does a negative gap influence unemployment?

Answer 3

Increases due to low AD

Question 4

What is NAIRU?

Answer 4

Non Accelerating Inflation Rate of Unemployment
Unemployment rate consistent with constant RoIF

Question 5

Which economic policies are applied when the gap is negative?

Answer 5

Lowered IR - Boost demand + prevent deflation
Exp. Fiscal - AD rises (More Spending, Less Tax)

Question 6

Which economic policies are applied when the gap is positive?

Answer 6

Raised IR - Reduce demand + inflation
Def. Fiscal - AD falls (Less Spending, More Tax)

Question 7

How is potential output measured?

Answer 7

Estimation techniques
Hodrick-Prescott filter - Separates short + long term
Production Function - Calculates output based on inputs

Question 8

Why is there uncertainty around measuring the output gap?

Answer 8

Estimation liable to inaccuracies
Cyclical change within economy (Unemployment, Inf. etc)