2.5.2 Output Gaps

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8 Terms

1
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what is the long run trend rate of growth

the average sustainable rate of economic growth over a period of time

2
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what is actual growth

is the actual change (i.e the change in real GDP) over time

3
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what is an output gap

the difference between the actual level of GDP and the estimated long-term value for GDP

4
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what is a positive output gap

GDP is higher than long term value for GDP (LRAS curve)

5
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what is a negative output gap

GDP is lower than long term value for GDP (LRAS curve)

6
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how can output gaps be illustrated

using AS and AD diagrams, with LRAS showing full capacity output

7
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explain output gap using curves

  • equilibrium to the right of the LRAS shows economy working over capacity in short term

  • equilibrium to the left shows economy working under capacity

<ul><li><p>equilibrium to the right of the LRAS shows economy working over capacity in short term </p></li><li><p>equilibrium to the left shows economy working under capacity</p></li></ul><p></p>
8
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what do classical economists believe about output gaps

positive output gaps:

  • filled by long run economic growth => moving the LRAS curve

  • recession decrease AD or rise in production costs would decrease SRAS

negative output gaps:

  • would be brought back to equilibrium by rising AD or a fall in SRAS due to lower production costs