ECON 295 Chapter 24: Chapter 24.docx
9 Jan 2015
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Document Summary
The adjustment process: potential output and output gap. Recall that potential output is the total output that can be produced when all productive resources (land, labour ) are being used at their normal rates of utilization. When a nation"s actual output diverges from its potential output, the difference is called the output gap. If the intersection of the as and the ad curve (equilibrium real gdp) is lower than potential output then there a recessionary gap. If the intersection is higher than the potential output then there is an inflationary gap: factor prices and the output gap, output above potential (y > y*) Sometimes, the ad and as curves intersect where real gdp exceeds potential output. Because firms are producing beyond their normal capacity output, there is an unusually large demand for all factor inputs. This will lead to an increase in factor prices which in turn will increase the firm"s unit costs.
