The appropriate Keynesian response to an inflationary gap is shown in Figure 1(b). An inflationary gap exists when the short-run output exceeds the long-run aggregate supply. Thus at Y f level of full employment output, there occurs an inflationary gap to the extent of AB. We concentrate here on the link to inflation. Inflationary Gap Definition. A decline in the short-run aggregate supply will lead to stagflation, which is characterized by both high unemployment and high inflation. A recessionary output gap is characterized by Real GDP falling below potential output. 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. 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 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 inflationary gap is labeled on the graph below. 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. The GDP Gap. O Above Full Employment GDP O Equivalent To Full Employment 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. C) real output that varies one-for-one with aggregate demand. It is one type of output gap, the other being a recessionary gap Overview. The result would be downward pressure on the price level, but very little reduction in output or very little rise in unemployment. 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 inflationary output gap is characterized by Real GDP exceeding 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. Which of the following will occur as part of the automatic adjustment process in an economy with an inflationary gap? The GDP gap is defined as the difference between potential GDP and real GDP. E) real GDP falling below potential output. 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. An inflationary output gap is characterized by A) falling prices. An inflationary gap, in economics, is the amount by which the actual gross domestic product exceeds potential full-employment GDP. B) constant prices. 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. D) real GDP exceeding potential output. 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. 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