Output Gaps Flashcards
What is the Output Gap
Difference between the actual level of GDP and its estimated potential level
How do you show negative output gap on AD-AS diagram
Equilibrium level of national income is less than long run potential output
What is a positive output gap
Where actual GDP is above potential GDP
What is a positive output gap a sign of
Possible excess aggregate demand
What is a negative output gap
Where the economy has large margin of spare capacity of factor resources
How to combat a negative output gap
Short run economic growth
Helps to reduce spare capacity - reduces a negative output gap
When does a negative output gap exist
When the actual level of real GDP is below the trend line
During a recession
When does a positive output gap exist
When the actual level of real GDP is likely to be above the trend line
During an inflationary boom
