Inflationary and Recessionary Gaps

In AP Macroeconomics, the economy isn't always in perfect long-run equilibrium. When it isn't, there is a gap between the equilibrium GDP in the long run and the short(er)-term equilibrium GDP. There are two types of gaps in AP Macro: recessionary and inflationary gaps.

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Recessionary Gaps

In a recessionary gap, there is a lower short-run equilibrium value than the long-run equilibrium value and can be visualized by a leftward shift in aggregate demand.

As you can see, there is a lower value for the short-run equilibrium compared to the long run, implying a recessionary gap. Recessionary gaps are characterized by high unemployment and low prices. This gap can be closed either in the long run by a shift in short-run aggregate supply due to wage changes, or by expansionary fiscal/monetary policy.

Long-Run Adjustment

For a recessionary gap, in the long run, SRAS shifts to correct the gap. The way this happens is: low prices lead to lower nominal wages, which leads to a rightward shift in SRAS, closing the gap.

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Inflationary Gaps

In a recessionary gap, there is a higher short-run equilibrium value than the long-run equilibrium value and can be visualized by a rightward shift in aggregate demand.

As you can see, there is a higher value for the short-run equilibrium (Ye) compared to the long run (Yf), implying an inflationary gap. Inflationary gaps are characterized by low unemployment and high prices. This gap can be closed either in the long run by a shift in short-run aggregate supply due to wage changes, or by contractionary fiscal/monetary policy.

Long-Run Adjustment

For an inflationary gap, in the long run, SRAS shifts to correct the gap. The way this happens is: higher prices lead to higher nominal wages, which leads to a leftward shift in SRAS, closing the gap.

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Graphs for Policy Changing AD

Congratulations! You now understand inflationary and recessionary gaps and how they can be created and closed. Good luck!

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