Aggregate Demand (AD), Short-run Aggregate Supply (SAS), and Long-run Aggregate Supply (LAS) can all be represented on a graph as a curve. The AD curve is downward sloping, the SAS curve is upward sloping, and the LAS is a vertical line. The point at which either AD intersects SAS or AD intersects LAS is called the equilibrium point.
Sometimes AD is below the potential output because not all of the resources in the economy are being fully used. The amount that equilibrium output is below potential output is called the recessionary gap. For example if potential output is 1,500,000 and the equilibrium output is 1,000,000, then the recessionary gap is 500,000.
This occurs when the income is greater than the potential output. There is more demand than is able to be produced. During these times, inflation rises and trade worsens. To help control inflationary gaps, the government will use fiscal or monetary policies.
The situation of the inflationary gap cannot last long because resources are being over utilized and will eventually return to potential output.
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