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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.