Principles of Macroeconomics / Unit 8 MAC 0722 short lesson, about 20 seconds
Recessionary and Inflationary Gaps
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The idea
When equilibrium output falls short of potential GDP the difference is a recessionary gap. When it exceeds potential the difference is an inflationary gap.
In practice
A recessionary gap means unemployment above the natural rate; an inflationary gap means it is below.
Where people slip
An inflationary gap is not sustainable, because output above potential relies on overtime and extra shifts that cannot continue.
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