# 3.10 LRE Recessionary Gap and Inflationary Gap AP Macro

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“Guys. This video is a little bit different cause reaction effing and drop anything as as far as moving anything out these models and really i m just showing you that we ve already kind of discussed. But we re gonna look at a little bit differently alright starting. All the way to the right we have our agri supply a great demand model.

And it is beginning in long run equilibrium. So here s a thing of how questions are going to go. So. This is kind of a helping you out d ready to answer questions video.

There s always going to be a starting point. When you have an fr cue. When we asked to draw changes in you know changing how your demand changing out your supply. Whatever.

The case is it ll tell you this scenario. And so. The scenario will tell you ii started one. So we have three different starting points.

Here. We have an economy beginning in long run equilibrium. We have an economy beginning in a recessionary gap and we have an economy in an inflationary gap. And so really i just want to describe each one of these three things we can see it.

But this is how you would start these models. So let s start with the base. One let s start with long run equilibrium. So as you see this one is the most basic one because equilibrium is where all three curves.

Meet..

We have a high demand. And they are crossing intersecting on our long run aggregate supply curve. We see that this yp hopefully. We remember from previous videos that yp.

Remember why that variable means three things it means real gdp means income and it means output. Those three things are all the same synonymous. So this is written called output and that p is for potential. So yp is potential output.

Okay. This is how much economy produces in the long run once prices and wages have become flexible. So once they ve had time to adjust another thing that this means and this is the important one that we re going to look at today is that when you re operating anywhere along this lra s. Curve on potential output.

What this means is that we are in a condition of full employment. So i m going to put that there so when we are in long run equilibrium. Full employment. Now you might have to go back in your mind through a previous section.

When we talk about full employment that does not mean that there is no unemployment. If you recall full on our full employment. I m sorry is structural plus frictional unemployment okay that is the natural rate of unemployment structural unemployment that s the type that means that your skills don t match jobs that are in demand. So that s a create structural employment frictional unemployment is time spent in a job search.

So we have those two types we add them together that equals our natural rate of unemployment natural rate of unemployment is the same as this it just be full. It is full employment. So we are out here. If you remember what kind of unemployment is missing from that and hopefully you got that it s cyclical.

There is no cyclical unemployment when we are on the long run curve cyclical unemployment is caused by changes in the business cycle..

So again think backward taking old ideas now we re showing how we look on this model. The business cycle. We have remember the kind of wave thing where we have an expansion a trough peak recession. So when we have cyclical unemployment.

It s caused by us either being in an expansion or being in our session by one of those things when we re on the long run curve. There is no cyclical unemployment. So that means that we re at the full level of unemployment. So natural rate of unemployment or full employment.

When we re on the long run curve on the other hand in this center. One this is a recessionary gap. So the question tell you the kind of beginning and intersession air gap or they might expect you to know what the case will be with unemployment. So what is unemployment like well we might be able to answer just because the word recession and we know is bad for an economy.

So we might figure it out that way what i want you to us to do is do it this way. What is happening to output here. So the key thing here when we are any recessionary gap. How do we draw this so before i get into explain not skip everything that s relative here we have our lrs curve.

We have our srs average man. We notice is that the short run on your supply. Curve and the aggregate demand curve that they are intercepting to the left of the long run address fiber. So you one we see is to the left.

So that means is actual output is less than potential output which we had written this previously. But let s go ahead and put that so actual output. Which is y is less than potential output. And we see this right here y.

1..

And yp and this is our recessionary gap. So that recessionary gap is the difference between potential output and actual output. And so when potential output is greater than actual output that means that we are in a recessionary gap. So the way that we draw that is simply to have ad and s.

Are a fs intersect. Anywhere to the left of the lra s. Curve. Okay.

The lra s. Probe. Doesn t have to be dead center. That doesn t matter the idea with the reader or the greater.

We ll be looking for is is that equilibrium to the left. And so what is that showing us so it s showing us first of all that potential output is greater than actual output. So how we can do this and we re going to walk through this in more detail later on we ve kind of already done this previously so step. One is that we have clearly falling output.

We have less output that s what that says output is less than potential output as a result of having less output. Do we need as many workers. The answer is no because we are not producing as much that is what this is telling us output is falling. It is below potential.

It means that we re going to have higher unemployment. Okay so another key thing by looking at our aggregate supply at a great demand model. We can know what unemployment is even though there are no numbers on this model. We know right now that at e1 actual unemployment is above the natural rate.

So we have high unemployment here so anytime..

We re in a recessionary gap or anytime. We re to the left of el ras. We have high unemployment on the other hand with the inflationary gap. So we can move through this one.

It s not too different to the exact opposite really the inflationary gap. What we re seeing here is that actual output you want is to be rights of the lra s. Curve. So actual output is greater than potential output.

So what that means is we are producing above and beyond. What we can do at full employment level. So number one output is high as a result of that when output is high we need more workers so unemployment is going to fall. So we are going to have low unemployment.

So when we are operating at e1. In an inflationary gap. Which is anywhere to the right beyond el ras. This means that we have low unemployment.

So i want us to be able to look at these models no longer in equilibrium. We are in exactly equal to full employment here we are unemployment is greater than full employment. It is above the natural rate. We have high unemployment and in an inflationary gap.

We have low unemployment now as far as how these are possible they ve been discussed in other videos and will be discussed in future videos. So know more about that quite yet. This is how we draw these and this is what this stuff means so again don t overlook this video. I think this can be helpful even though you know we didn t really do anything to our models to show what all these things mean so again hope that helps you guys until next time this ” .

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