Natural Rate of Unemployment - Causes of output gaps (Short-Run Behaviour)

10 important questions on Natural Rate of Unemployment - Causes of output gaps (Short-Run Behaviour)

What causes output gaps in markets?

Two main causes include time to reach equilibrium and changes in total spending levels.

How do firms respond to current prices during an adjustment period?

Production aims to meet demand based on the current prices set in the market.

What happens when total spending is low?

Output will fall below its potential output level during such times.
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What is a primary cause of output gaps?

Changes in economy-wide spending are the main reasons for output gaps.

How can governments influence output gaps?

Adjusting government spending is a method to close the output gap.

When does consumer spending fall?

Spending decreases due to job losses, prices rising, and cash flow problems.

What is the impact of lower consumer spending?

The economy experiences slower growth and increased risk of inflation.

Why do firms hold back on investment?

High costs of funds and weak protection of intellectual property deter investments.

What discourages innovation in firms?

The risk of idea theft and lack of patent enforcement discourage firms significantly.

How can governments stimulate the economy?

By increasing spending on infrastructure, education, and healthcare.

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