Macroeconomics
In both diagrams, short-run equilibrium is atoutputY₁andpricelevelPL₁.ButnoticehowtheADand SRAS curves can intersect either below or above the LRAS curve, which represents fullemployment. What does this signify? The stickiness of wages and prices in the short run slows down adjustments to economic changes, impeding the economy's ability to operate at its potential output , represented by Y f on the LRAS curve. This leads to the existence of output gaps , which are defned as the difference between an economy's full productive capacity (i.e., the level of full employment represented by LRAS or potentialGDP)anditscurrentoutputlevel,determinedbytheintersectionofADandSRAS(actual GDP) . These output gaps can be either recessionary or inflationary , depending on whether the short-run equilibrium falls below or above the fullemployment level . Study Tip Actual real GDP measures aneconomy'scurrentproduction,whereaspotentialrealGDPrepresents its maximum sustainable capacity. The comparison helps identify output gaps, guides economic policies, and supports stable and growth-oriented decisions. Recessionary Output Gaps A recessionaryoutputgap ,alsoknownasa negativeoutputgap ,occurswhentheADcurveintersects withtheSRAScurve below theLRAScurve.Inotherwords,itoccurswhen short-runequilibriumfalls below the full-employment level . In this AD-AS model, the recessionary gap is represented by the difference between Y f and Y 1 . This indicates that the current output (Y₁) is less than potential output (Y f ). On a business cycle, the recessionary gap corresponds to a point where the economy is facing a recession or economic downturn . This means that currentoutput is too low .
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