When the aggregate demand and short-run aggregate supply curves intersect below potential output
, the economy has a recessionary gap. When they intersect above potential output, the economy has an inflationary gap.
What is an example of a recessionary gap?
Some industries may experience pay cuts due to internal business practices, or the effect of economic circumstances. For example, during a recession,
people spend less on going out to eat
, which means that restaurant workers receive less income in the form of tips.
What does it mean to say that the economy is in a recessionary gap in an inflationary gap in long run equilibrium?
In a recessionary gap, the actual unemployment rate is greater than the natural unemployment rate; in an inflationary gap, the actual unemployment rate is less than the natural unemployment rate; and in long-run equilibrium,
the actual unemployment rate equals the natural unemployment rate
.
What is a recessionary gap and how can the government close one?
A recessionary gap, or contractionary gap, occurs
when a country's real GDP is lower than its GDP at full employment
. Recessionary gaps close when real wages return to equilibrium, and the quantity of labor demanded equals the quantity supplied.
What are the tools the government can use when the economy is in a recessionary gap?
Governments may use
fiscal policy—additional government spending or tax cuts—
to stimulate the economy during a recession. A fiscal multiplier is an estimate of the increased output caused by a given increase in government pending or reduction in taxes.
What does it mean to say the economy is in a recessionary gap?
Essentially, a recessionary gap refers to
the difference between actual and potential production in an economy
, with the actual being lower than the potential, which puts downward pressure on prices in the long run. … Significant reductions in economic activity for several months will indicate a recession.
How do you fix an inflationary gap?
For the gap to be considered inflationary, the current real GDP must be higher than the potential GDP. Policies that can reduce an inflationary gap include
reductions in government spending, tax increases, bond and securities issues, interest rate increases, and transfer payment reductions
.
Is a recessionary or inflationary gap bad for an economy?
For an economy with a
recessionary gap
, unacceptably high levels of unemployment will persist for too long a time. For an economy with an inflationary gap, the increased prices that occur as the short-run aggregate supply curve shifts upward impose too high an inflation rate in the short run.
Is the economy facing an inflationary or a recessionary gap?
a. Is the economy facing an inflationary or a recessionary gap? The
economy is facing a recessionary gap
because Y1 is less than the potential output of the economy, YP.
What could cause a recessionary gap?
What might cause a recessionary gap?
Anything that shifts the aggregate expenditure
What tools can the government do to stimulate growth?
Government has a variety of policy tools for increasing the rate of return for new technology and encouraging its development, including:
direct government funding of R&D, tax incentives for R&D, protection of intellectual property
, and forming cooperative relationships between universities and the private sector.
How does the economy adjust to eliminate a recessionary gap?
The self-correction mechanism acts to close a recessionary gap with lower wages and
an increase in the short-run aggregate supply curve
. … The key to this process is that changes in wages and other resource prices cause the short-run aggregate supply curve to shift.
How do you stop a deflationary gap?
- Lowering bank reserve limits.
- Open market operations (OMO)
- Lowering the target interest rate.
- Quantitative easing.
- Negative interest rates.
- Increasing government spending.
- Cutting tax rates.
Why is an inflationary gap bad?
When an inflationary gap occurs,
the economy is out of equilibrium level
, and the price level of goods and services will rise (either naturally or through government intervention) to make up for the increased demand and insufficient supply—and that rise in prices is called demand-pull inflation.
How is unemployment affected by the business cycle?
Unemployment increases during business cycle recessions and decreases during business cycle expansions (recoveries)
. … If the equilibrium level of output is less than the full employment level as illustrated on the graph above, this indicates that some available resources are unemployed and less is being produced.
