Output Gaps (Economic Fluctuations)

Output Gaps (Economic Fluctuations)

Automatic (Self) Adjustment to a Recessionary Gap

• In a recessionary gap there is an excess

  supply

  ---

  of labor.
• In the long run, workers are willing to work for

  less

  ---

  so wages

  decrease

  ---

• AS shifts to the

  right

  ---

  . The output

  increases

  ---

  and price level

Automatic (Self) Adjustment to an Inflationary Gap

• In an inflationary gap there is an excess

  demand

  ---

  for labor.
• Wages

  increase

  ---

• AS shifts to the

  left

  ---

  . The output

  decreases

  ---

  and price level

  increases

  ---

  .