5 Steps to a 5 AP Macroeconomics 2019

Aggregate Demand and Aggregate Supply ❮ 113

equilibrium at full employment GDPf and price level PLf at the intersection of AD, SRAS,

and LRAS.

Recessionary and Inflationary Gaps

When the economy is in equilibrium, but not at the level of GDP that corresponds to full

employment (GDPf), the economy is experiencing either a recessionary or an inflationary gap.

As the name implies, a recessionary gap exists when the economy is operating below GDPf and

the economy is likely experiencing a high unemployment rate. In Figure 9.7, the recessionary

gap is the difference between GDPf and GDPr, or the amount that current real GDP must rise

to reach GDPf.

KEY IDEA

SRAS

Real GDP

Price

Level

GDPr GDPf

LRAS

AD

Figure 9.7

An inflationary gap exists when the economy is operating above GDPf. Because pro­

duction is higher than GDPf, a rising price level is the greatest danger to the economy. In

Figure 9.8, the inflationary gap is the difference between GDPi and GDPf, or the amount

that real GDP must fall to reach GDPf.

Figure 9.8

SRAS

Real GDP

Price

Level

GDPf GDPi

LRAS

AD

Shifting AD

Since you have mastered the microeconomic tools of supply and demand, you should have

little trouble predicting how macroeconomic factors affect real GDP and the price level.

“Be able to locate
these on a graph.”
––AP teacher