Macroeconomics

‭Infationary Gap on PPC, AD-AS Model, and Phillips Curve Model‬ ‭An inflationary gap is an output gap characterized by a high price level and low unemployment at an‬ ‭equilibrium above the economy’s full potential. It is illustrated on the three models as follows:‬

‭AD-AS‬ ‭model:‬ ‭AD,‬ ‭SRAS,‬ ‭and‬ ‭LRAS‬ ‭intersect‬ ‭at‬ ‭point‬ ‭X‬ ‭above‬ ‭the‬ ‭long-run‬ ‭equilibrium.‬ ‭Here,‬ ‭actual‬‭output‬‭(Y₁)‬‭>‬‭potential‬‭output‬‭(Y‬ ‭f‬ ‭)‬‭which‬‭puts‬ ‭upward pressure on prices.‬

‭PPC:‬ ‭The‬ ‭economy‬ ‭is‬ ‭operating‬ ‭at‬ ‭point‬ ‭X‬ ‭or‬ ‭any‬ ‭other‬ ‭point‬ ‭outside‬ ‭the‬ ‭curve,‬ ‭indicating‬ ‭unattainable‬ ‭production‬ ‭given‬ ‭existing‬ ‭resources and/or technology.‬

‭Phillips‬ ‭curve‬ ‭model:‬ ‭The‬ ‭economy‬ ‭is‬ ‭operating‬ ‭at‬ ‭point‬ ‭X‬ ‭or‬ ‭any‬ ‭other‬ ‭point‬ ‭below‬ ‭LRPC.‬ ‭Here,‬ ‭actual‬ ‭unemployment‬ ‭(UR₁)‬ ‭<‬ ‭natural‬ ‭rate‬ ‭of‬ ‭unemployment‬ ‭(NRU),‬ ‭and‬ ‭actual‬ ‭inflation‬‭rate‬‭>‬‭expected‬ ‭inflation‬ ‭rate,‬ ‭indicating‬ ‭a‬ ‭low‬ ‭unemployment‬ ‭rate‬ ‭and‬ ‭a‬ ‭high‬ ‭inflation‬ ‭rate.‬

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