What describes a Positive Output Gap?

What describes a Positive Output Gap?

• A. Exists when aggregate output is below potential output; gap to the left of LRAS.
• B. Exists when aggregate output is at potential output; LRAS aligns.
• C. Exists when aggregate output is above potential output; gap to the right of LRAS.
• D. Is caused by automatic stabilizers.

Answer: (C)

A Positive Output Gap occurs when actual output is higher than the economy’s sustainable level, meaning the economy is operating to the right of its potential. The potential level of output is what you’d get if resources were fully employed, and it’s represented by the vertical LRAS line. When growth pushes actual GDP above this point, firms are using resources more intensely than is sustainable, unemployment falls below the natural rate, and inflationary pressures tend to rise as demand outpaces capacity. That’s the overheating scenario the diagram captures with a spot to the right of LRAS. In contrast, a gap to the left of LRAS would be a negative gap (actual output below potential), a gap exactly at LRAS would be zero, and automatic stabilizers describe policy features that dampen fluctuations rather than define the gap itself.

A Positive Output Gap occurs when actual output is higher than the economy’s sustainable level, meaning the economy is operating to the right of its potential. The potential level of output is what you’d get if resources were fully employed, and it’s represented by the vertical LRAS line. When growth pushes actual GDP above this point, firms are using resources more intensely than is sustainable, unemployment falls below the natural rate, and inflationary pressures tend to rise as demand outpaces capacity. That’s the overheating scenario the diagram captures with a spot to the right of LRAS. In contrast, a gap to the left of LRAS would be a negative gap (actual output below potential), a gap exactly at LRAS would be zero, and automatic stabilizers describe policy features that dampen fluctuations rather than define the gap itself.