So far, we have learned to measure real GDP, but how do we end up with that real GDP? Of all of the different amounts of national income and price levels that might exist, how do we gravitate toward the one that gets measured each year as real GDP? In short, it is the interaction of the buyers and producers of all output that determines both the national income (real GDP) and the price level. In other words, the intersection of aggregate demand (AD) and short-run aggregate supply (SRAS) determines the short-run equilibrium output and price level. Once we have a short-run equilibrium output, we can then compare it to the full employment output to figure out where in the business cycle we are. If current real GDP is less than full employment output, an economy is in a recession. If current real GDP is higher than full employment output, an economy is experiencing a boom. If the current output is equal to the full-employment output, then we say that the economy is in long-run equilibrium. The output isn’t too low, or too high. It’s just right. Based on the text above answer the questions; (a) Explain and illustrate graphically recessionary and inflationary gaps.
So far, we have learned to measure real
of
real GDP?
In short, it is the interaction of the buyers and producers of all output that determines both the national income (real GDP)
and the price level. In other words, the intersection of aggregate demand (AD) and short-run
determines the short-run equilibrium output and price level.
Once we have a short-run equilibrium output, we can then compare it to the full employment output to figure out where in
the business cycle we are. If current real GDP is less than full employment output, an economy is in a recession. If current
real GDP is higher than full employment output, an economy is experiencing a boom. If the current output is equal to the
full-employment output, then we say that the economy is in long-run equilibrium. The output isn’t too low, or too high. It’s
just right.
Based on the text above answer the questions;
(a) Explain and illustrate graphically recessionary and inflationary gaps.
b) Identify the various policy choices available when an economy experiences an inflationary or
recessionary gap and discuss some of the pros and cons that make these choices controversial.
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