Potential output - Output gaps

7 important questions on Potential output - Output gaps

What is the output gap?

It is the difference between an economy's actual output and potential output.

How is the output gap calculated in percentage?

Output gap (%) = (Y-Y*)/Y* x 100.

What does a recessionary gap indicate?

It indicates that resources are not being fully utilized when Y* > Y.
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What characterizes an expansionary gap?

It is when actual output exceeds potential, showing above normal resource utilization. Y*<Y

When do policymakers consider stabilization policies?

They consider them when there are output gaps present in the economy.

What do recessionary gaps signal about output and employment?

They signal that both are less than their sustainable level.

What is a consequence of expansionary gaps?

Expansionary gaps can lead to inflation in the economy.

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