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