Output Gaps

Question 1

Output Gaps

Answer 1

When there is a difference between actual GDP and portential GDP

Question 2

Positive Output Gap

Answer 2

When actual GDP is above potential GDP

Question 3

Negative Output Gap

Answer 3

When actual GDP is below potential GDP

Question 4

Positive Impacts of positive output gaps

Answer 4

• Confidence increases
• Economic growth increases
• Encourage policy makers to pursue in contractionary fiscal and monetary policy

Question 5

Negative Impacts of positive output gaps

Answer 5

• Unsustainable as workers get tired and machinery depreciates
• Price levels increase, inflation increases
• Workers bargain higher wages costs of production increase so cost-push inflation increases
• Wage price spiral

Question 6

Positive Impact of negative output gaps

Answer 6

Encourages policy makers to pursue in expansionary fiscal and monetary policy

Question 7

Negative Impacts of negative output gaps

Answer 7

• Confidence decreases
• Economic growth decreases
• Recessions
• Cyclical unemployment
• deflationary spiral

Question 8

Evaluating the significance of output gaps

Answer 8

1. Depends on the school of thought
- the neoclassical approach say that the negative output gap is nothing to worry about as it is self correcting
- believe that everyone has perfect info and are rational so lower wage expectation
- however, keynes believe that the way to correct negative output gaps is gov intervention
- fiscal policy

2. Depends on the cause of the output gap
- if the negative output gap is due to debt fuelled consumption itmay actually lead to bigger debt
- in the long term, people may not be able to pay back these debts leading to reposession of homes

3. Duration of change