Question

**MUST. BE. TYPED**

My question after reading chapter 25 is, what is the difference recessionary output gaps and expansionary output gaps? And how do you eliminate these output gaps?

Answer 1

Recessionary gap is the difference between full employment or potential GDP and actual GDP, that is when actual GDP is less than potential GDP. It happens when economy operates to the left of long run aggregate supply curve.

Inflationary gap is the difference between actual GDO and full employment or potential GDP, that is when actual GDP is greater than potential GDP. It happens when the economy operates to the right of long run aggregate supply curve.

Inflationary gap is eliminated by contractionary monetary or/and fiscal policy. That is decreasing money supply, increasing taxes and/or decreasing government spending.

Recessionary gap is eliminated by expansionary monetary or/and fiscal policy. That is increasing money supply, decreasing taxes and/or increasing government spending.