Macroeconomics

‭Infationary Output Gaps‬ ‭An‬ ‭inflationary‬ ‭output‬‭gap‬ ‭,‬‭also‬‭known‬‭as‬‭a‬ ‭positive‬‭output‬‭gap‬ ‭,‬‭occurs‬‭when‬‭the‬‭AD‬‭curve‬‭intersects‬ ‭with‬‭the‬‭SRAS‬‭curve‬‭curve‬ ‭above‬ ‭the‬‭LRAS‬‭curve.‬‭In‬‭other‬‭words,‬‭it‬‭occurs‬‭when‬ ‭short-run‬‭equilibrium‬ ‭is above the full-employment level‬ ‭.‬ ‭In‬‭the‬‭AD-AS‬‭model‬‭below,‬‭the‬‭inflationary‬‭gap‬‭is‬‭represented‬‭by‬‭the‬‭difference‬‭between‬‭Y₁‬‭and‬‭Y‬ ‭f‬ ‭.‬‭This‬ ‭indicates that the current output (Y₁) is higher than potential output (Y‬ ‭f‬ ‭).‬ ‭On‬‭a‬‭business‬‭cycle,‬‭the‬‭inflationary‬‭gap‬‭corresponds‬‭to‬‭a‬‭point‬‭where‬ ‭the‬‭economy‬‭is‬‭facing‬‭a‬‭boom‬ ‭.‬ ‭This‬ ‭means‬ ‭that‬ ‭the‬ ‭current‬ ‭output‬ ‭is‬ ‭too‬ ‭high‬ ‭which‬ ‭may‬ ‭lead‬ ‭to‬ ‭inflation‬‭because‬‭producing‬‭more‬ ‭than full employment is not sustainable and is usually associated with a higher price level.‬

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