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Hello everyone! In this article you will find out what inflationary and recessionary gaps are and their significance as it relates to AP Macroeconomics. 

Definition of Recessionary and Inflationary Gaps

  • Recessionary Gaps occur when the output level of aggregate expenditure (AD) is below potential GDP 
  • Potential GDP is where LRAS intersects the x-axis
  • A negative gap between the GDP at equilibrium and GDP in the current macroeconomy.
  • Inflationary gaps occur when the output level of aggregate expenditure (AD) is above potential GDP
  • A positive gap between the GDP at equilibrium and the GDP in the current macroeconomy.

What causes Recessionary and Inflationary Gaps?

Recessionary Gaps are caused by

  • decline in consumption, a rise in savings, a fall in investment, a drop in government spending or a rise in taxes, or a fall in exports or a rise in imports.
  • Anything that shifts AD to the left

Inflationary Gaps are caused by

  • Increase in consumption, a decrease in savings, an increase in investment, an increase in government spending or a decrease in taxes, or a rise in exports and fall in imports
  • Anything that shifts AD to the right    

Why must Recessionary and Inflationary Gaps be fixed?

  • If recessionary and Inflationary Gaps are not fixed, the health of the macroeconomy will be compromised. 
  • If an economy contains a recessionary gap for too long, it may fall into a depression. 
  • Likewise, if an economy contains an inflationary gap for too long, it may result in runaway inflation, rendering people’s money as practically worthless.
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