Macroeconomic Equilibrium and Gaps

What determines short-run AD-AS equilibrium?

The intersection of AD and SRAS determines real output and the price level.

What is potential GDP?

The output level the economy can sustain with resources employed at normal rates.

What is a recessionary gap?

Equilibrium real GDP is below potential GDP.

What happens during a recessionary gap?

Unemployment is generally elevated and wage or price pressures weaken.

How does the standard model close a recessionary gap?

Costs adjust downward or rise more slowly; SRAS shifts right toward potential output.

What is an inflationary gap?

Equilibrium real GDP is above potential GDP.

What happens during an inflationary gap?

Resources face pressure and wages and input costs tend to rise.

How does the standard model close an inflationary gap?

Rising costs shift SRAS left, returning output toward potential GDP.

What is stagflation?

High inflation combined with weak output or rising unemployment, often after an adverse supply shock.

What happens when AD increases in the short run?

Real GDP and the price level generally rise along the existing SRAS curve.

What happens when AD decreases in the short run?

Real GDP and the price level generally fall along the existing SRAS curve.

What happens to output after long-run adjustment?

Output tends toward potential GDP; the price level may remain different.