The economy with output of Y 2 and price level of P 2 is only in short-run equilibrium; there is an inflationary gap equal to the difference between Y 2 and Y P. Because real GDP is above potential, there will be pressure on prices to rise further. A decline in the short-run aggregate supply will lead to stagflation, which is characterized by both high unemployment and high inflation. The result would be downward pressure on the price level, but very little reduction in output or very little rise in unemployment. The output gap is used for two primary purposes - the analysis of inflationary pressure and cyclical adjustment of other variables, notably the public sector deficit. E) real GDP falling below potential output. If AE 0 shifts down to AE 1, so that the new equilibrium is at E 1, then the economy will be at potential GDP without pressures for inflationary price increases. An inflationary gap exists when the short-run output exceeds the long-run aggregate supply. An inflationary output gap is characterized by Real GDP exceeding potential output. The vertical distance between the aggregate demand and the 45° line at the full employment level of national income is termed the inflationary gap. An output gap is an economic measure of the difference between the actual output of an economy and the output it could achieve when at full capacity. A recessionary output gap is characterized by Real GDP falling below potential output. Which of the following will occur as part of the automatic adjustment process in an economy with an inflationary gap? An inflationary output gap is characterized by A) falling prices. O Above Full Employment GDP O Equivalent To Full Employment GDP. An inflationary gap, in economics, is the amount by which the actual gross domestic product exceeds potential full-employment GDP. The economy with output of Y 2 and price level of P 2 is only in short-run equilibrium; there is an inflationary gap equal to the difference between Y 2 and Y P. Because real GDP is above potential, there will be pressure on prices to rise further. In other words, because of full employment, output cannot increase to Y*. B) constant prices. The inflationary gap is labeled on the graph below. Inflationary Gap Definition. Assume the economy begins in a long-run equilibrium where the aggregate demand AD 1 , short-run aggregate supply (SRAS), and long-run aggregate supply (LRAS) intersect. Rising wages The GDP Gap. Question: Question 3 1 Pts An Inflationary Output Gap Is Defined To Be When The Current Level Of Output Is: High Enough To Cause An Unexpected Amount Of Inflation Below Full Employment GDP. The GDP gap is defined as the difference between potential GDP and real GDP. The original intersection of aggregate expenditure line AE 0 and the 45-degree line occurs at $8,000, which is above the level of potential GDP at $7,000. It is one type of output gap, the other being a recessionary gap Overview. Reading 14 LOS 14j: Distinguish between the following types of macroeconomic equilibria; Long-run full employment, short-run recessionary gap, short-run inflationary gap, and short-run stagflation. 1.1 An underlying theory of the output gap In the event of a (positive) output gap caused by a positive demand shock, firms will We concentrate here on the link to inflation. The appropriate Keynesian response to an inflationary gap is shown in Figure 1(b). C) real output that varies one-for-one with aggregate demand. D) real GDP exceeding potential output. Thus at Y f level of full employment output, there occurs an inflationary gap to the extent of AB. 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