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Understanding Output Gaps and Unemployment with Simple Diagrams

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Joseph Raphael

10/04/2023

Economics

Output Gaps

Understanding Output Gaps and Unemployment with Simple Diagrams

The business cycle and output gaps are crucial concepts in macroeconomics, affecting employment, inflation, and economic growth. This summary explores output gaps, their types, and their relationship to the business cycle and unemployment.

  • Output gaps represent the difference between actual GDP and potential GDP
  • Negative output gaps occur when actual output is below potential, leading to cyclical unemployment
  • Positive output gaps happen when actual output exceeds potential, potentially causing inflation
  • Understanding output gaps is essential for policymakers and economists to assess economic health and implement appropriate measures
...

10/04/2023

38

Price
Level
PL²
PL
{Output Gaps
CRAS
1
AS
"AD²
Y'YF' YET
FGPP
The output gop is the difference between
the actual level of GDP and its estim

View

Output Gaps and Keynesian Aggregate Supply

The second page delves deeper into output gaps, focusing on the Keynesian perspective of aggregate supply and its relationship to unemployment.

The diagram on this page illustrates a situation where the equilibrium level of national income (Y') is below the full employment level (YFE). This scenario represents a negative output gap, which is associated with cyclical unemployment.

Definition: Cyclical unemployment occurs when there is insufficient aggregate demand in the economy to provide jobs for everyone who wants to work.

Highlight: A negative output gap is closely linked to cyclical unemployment, as the economy is operating below its full potential.

The Keynesian aggregate supply curve is shown as relatively flat in the short run, indicating that changes in aggregate demand can have significant effects on output and employment without causing substantial changes in the price level.

Example: In a recession, a negative output gap may lead to layoffs in various industries as businesses reduce production due to decreased demand.

The diagram also shows multiple aggregate demand curves (AD1, AD2, AD3), illustrating how shifts in aggregate demand can affect the equilibrium level of output and potentially close or widen the output gap.

Understanding the relationship between output gaps, unemployment, and aggregate supply is crucial for policymakers when designing strategies to combat economic downturns and promote sustainable growth.

Vocabulary: Potential GDP (or potential output) is the maximum sustainable output an economy can produce when all resources are fully and efficiently employed.

This page emphasizes the importance of considering both the supply and demand sides of the economy when analyzing output gaps and their effects on employment and economic performance.

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Economics

38

10 Apr 2023

2 pages

Understanding Output Gaps and Unemployment with Simple Diagrams

user profile picture

Joseph Raphael

@joeraphael9

The business cycle and output gaps are crucial concepts in macroeconomics, affecting employment, inflation, and economic growth. This summary explores output gaps, their types, and their relationship to the business cycle and unemployment.

  • Output gapsrepresent the difference between actual... Show more
Price
Level
PL²
PL
{Output Gaps
CRAS
1
AS
"AD²
Y'YF' YET
FGPP
The output gop is the difference between
the actual level of GDP and its estim

Sign up to see the contentIt's free!

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Improve your grades

Join milions of students

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Output Gaps and Keynesian Aggregate Supply

The second page delves deeper into output gaps, focusing on the Keynesian perspective of aggregate supply and its relationship to unemployment.

The diagram on this page illustrates a situation where the equilibrium level of national income (Y') is below the full employment level (YFE). This scenario represents a negative output gap, which is associated with cyclical unemployment.

Definition: Cyclical unemployment occurs when there is insufficient aggregate demand in the economy to provide jobs for everyone who wants to work.

Highlight: A negative output gap is closely linked to cyclical unemployment, as the economy is operating below its full potential.

The Keynesian aggregate supply curve is shown as relatively flat in the short run, indicating that changes in aggregate demand can have significant effects on output and employment without causing substantial changes in the price level.

Example: In a recession, a negative output gap may lead to layoffs in various industries as businesses reduce production due to decreased demand.

The diagram also shows multiple aggregate demand curves (AD1, AD2, AD3), illustrating how shifts in aggregate demand can affect the equilibrium level of output and potentially close or widen the output gap.

Understanding the relationship between output gaps, unemployment, and aggregate supply is crucial for policymakers when designing strategies to combat economic downturns and promote sustainable growth.

Vocabulary: Potential GDP (or potential output) is the maximum sustainable output an economy can produce when all resources are fully and efficiently employed.

This page emphasizes the importance of considering both the supply and demand sides of the economy when analyzing output gaps and their effects on employment and economic performance.

Price
Level
PL²
PL
{Output Gaps
CRAS
1
AS
"AD²
Y'YF' YET
FGPP
The output gop is the difference between
the actual level of GDP and its estim

Sign up to see the contentIt's free!

Access to all documents

Improve your grades

Join milions of students

By signing up you accept Terms of Service and Privacy Policy

Understanding Output Gaps

The first page introduces the concept of output gaps in macroeconomics. An output gap is the difference between the actual level of GDP and its estimated potential level, usually expressed as a percentage of potential output.

The diagram on this page illustrates a negative output gap, where the equilibrium level of national income (Y') is less than the long-run potential output (YF'). This situation occurs when the economy is operating below its full capacity.

Definition: An output gap is the difference between actual GDP and potential GDP, expressed as a percentage of potential GDP.

Highlight: A negative output gap indicates that the economy is not reaching its full productive potential, which can lead to various economic consequences.

The diagram shows the relationship between aggregate demand (AD), aggregate supply (AS), and the long-run aggregate supply (LRAS) curves. The intersection of AD and AS determines the actual output, while the LRAS curve represents the economy's potential output.

Vocabulary: LRAS (Long-Run Aggregate Supply) represents the economy's productive capacity when all resources are fully employed.

Understanding the concept of output gaps is crucial for analyzing economic performance and implementing appropriate fiscal and monetary policies to address economic imbalances.

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This app is really great. There are so many study notes and help [...]. My problem subject is French, for example, and the app has so many options for help. Thanks to this app, I have improved my French. I would recommend it to anyone.

Samantha Klich

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Anna

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Thomas R

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Just amazing. Let's me revise 10x better, this app is a quick 10/10. I highly recommend it to anyone. I can watch and search for notes. I can save them in the subject folder. I can revise it any time when I come back. If you haven't tried this app, you're really missing out.

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This app has made me feel so much more confident in my exam prep, not only through boosting my own self confidence through the features that allow you to connect with others and feel less alone, but also through the way the app itself is centred around making you feel better. It is easy to navigate, fun to use, and helpful to anyone struggling in absolutely any way.

David K

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Sudenaz Ocak

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Greenlight Bonnie

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very reliable app to help and grow your ideas of Maths, English and other related topics in your works. please use this app if your struggling in areas, this app is key for that. wish I'd of done a review before. and it's also free so don't worry about that.

Rohan U

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I know a lot of apps use fake accounts to boost their reviews but this app deserves it all. Originally I was getting 4 in my English exams and this time I got a grade 7. I didn’t even know about this app three days until the exam and it has helped A LOT. Please actually trust me and use it as I’m sure you too will see developments.

Xander S

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This apps acc the goat. I find revision so boring but this app makes it so easy to organize it all and then you can ask the freeeee ai to test yourself so good and you can easily upload your own stuff. highly recommend as someone taking mocks now

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