Aggregate supply and potential GDP shift by the same amount
when the AD , P increases and AS increase but P down, the economy is growing and when potential GDP is at the equilibrium then we are at full employment Actual GDP= Potential GDP( here is no cyclical unemployment)
Recessionary gap
when the potential GDP > actual GDP. There is cyclical unemployment
To close this gap you have to either increase AS or Increase AD. To increase AS you can lower business taxes or lower the min wage (supply siders). to increase the AD you can increase government spending, lower taxes, lower interest rates, or increase the money supply. Alfred MArshal is to be blmed for theses graphs. the down side is high unemployment
Expansionary gap
Potential GDP< Actual GDP
to close this gap you need to decrease AS or AD. to do this you need to do the opposite of the recessionary gap.
it is better to decrease the demand to close the gap because it will lower prices. the down side is inflation. How to close this gap; raise biz taxes, increase minimum wage( will decrease AS) . To decrease AD; increase interest rate, decrease money supply and lower government spending.
what happens to potential GDP if wages fall; it stays the same. if new technology is implemented, it shifts it outward. Increas in technology, natural resources, real capital and quality and quantity of labour cause potential GDP to increase shift outward. The economy does not achieve full employment equilibrium when potential GDP shifts as a result of increase in technology, it creates a surplus and recessionary gap.
Dr. Stephanie Powers, "Aggregate Demand", Intro to Macroeconomics.(Lecture, Donald School of Business, Red Deer Alberta, Winter 2012)
Aggregate supply and potential GDP shift by the same amount
when the AD , P increases and AS increase but P down, the economy is growing and when potential GDP is at the equilibrium then we are at full employment Actual GDP= Potential GDP( here is no cyclical unemployment)
Recessionary gap
when the potential GDP > actual GDP. There is cyclical unemployment
To close this gap you have to either increase AS or Increase AD. To increase AS you can lower business taxes or lower the min wage (supply siders). to increase the AD you can increase government spending, lower taxes, lower interest rates, or increase the money supply. Alfred MArshal is to be blmed for theses graphs. the down side is high unemployment
Expansionary gap
Potential GDP< Actual GDP
to close this gap you need to decrease AS or AD. to do this you need to do the opposite of the recessionary gap.
it is better to decrease the demand to close the gap because it will lower prices. the down side is inflation. How to close this gap; raise biz taxes, increase minimum wage( will decrease AS) . To decrease AD; increase interest rate, decrease money supply and lower government spending.
what happens to potential GDP if wages fall; it stays the same. if new technology is implemented, it shifts it outward. Increas in technology, natural resources, real capital and quality and quantity of labour cause potential GDP to increase shift outward. The economy does not achieve full employment equilibrium when potential GDP shifts as a result of increase in technology, it creates a surplus and recessionary gap.
Dr. Stephanie Powers, "Aggregate Demand", Intro to Macroeconomics.(Lecture, Donald School of Business, Red Deer Alberta, Winter 2012)