Output Gaps 2.5

Question 1

Output Gap Def.

Answer 1

Difference between actual GDP and estimated long-term value for GDP. Difficult to measure as current GDP is often an estimate. Moreover, LRAS (or Productive Potential) is unknown

Question 2

Actual Growth v Long-Term Trends

Answer 2

Long-Run Trend of Growth - Average sustainable rate of economic growth over a period of time

Actual Growth - Actual change in Real GDP over time

Question 3

Negative Output Gap

Answer 3

When GDP is lower than Estimated Long-term Value for GDP. Means there is spare capacity in the economy

Question 4

AS & AD Output Gap Diagram

Answer 4

Equilibrium to the right of LRAS (e.g. SRAS1 = AD2) means positive output gap

Question 5

Classical Economist View on Output Gaps

Answer 5

Classical Economists would state that a negative output gap would be brought back to LRAS through rising AD, while a positive output gap would be fixed by LRAS being shifted rightwards or a recession causing a fall in AD