When the economy is experiencing an inflationary gap

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Macroeconomics for Today
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Chapter 6 / Exercise 8
Macroeconomics for Today
Tucker
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When the economy is experiencing an inflationary gap, the unemployment rate will fall below the natural rate.The distinction between the actual unemployment rate and the natural rate allows us to reconsider the short-run equilibrium in the macroeconomy. If AD and SRAS intersect at a level of output that falls below full-employment output (at the vertical long-run aggregate supply [LRAS] curve), the economy has a recessionary gap. If the AD and SRAS curves intersect at a real output that exceeds full employment, the economy has an inflationary gap. 1.Draw an AD/SRAS/LRAS curve that illustrates a recessionary gap. Label AD, SRAS. LRAS. PL, Y and
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Macroeconomics for Today
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Chapter 6 / Exercise 8
Macroeconomics for Today
Tucker
Expert Verified
Long-Run Aggregate Supply Worksheet 2.Draw an AD/SRAS/LRAS curve that illustrates a inflationary gap. Label AD, SRAS. LRAS. PL, Y and the full-employment level of output (YE) on the graph. 3.Draw an AD/SRAS/LRAS curve that illustrates a full employment equilibrium. Label AD, SRAS. LRAS. PL, and the full-employment level of output (YE) on the graph. Then suppose households in the United States experience a decrease in wealth. On your graph show the short run effect on output, unemployment, and the price level. Using the correct labels for the change. (A) Will the unemployment rate increase or decrease? Explain. (B) What type of gap results from the decrease in wealth? 5

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