A recessionary gap and an inflationary gap are two important concepts in economics that describe different conditions in the economy.
A recessionary gap occurs when the actual output of an economy is less than its potential output. This situation indicates that the economy is not utilizing all of its resources efficiently, resulting in higher unemployment and lower GDP. In this scenario, there is often a decrease in consumer demand, which leads businesses to cut back on production and employment.
On the other hand, an inflationary gap arises when the actual output exceeds the potential output of the economy. In this case, demand outstrips supply, leading to upward pressure on prices, or inflation. This situation can result in excessively high production levels, where businesses may struggle to keep up with consumer demand, causing prices to rise rapidly as businesses vie to sell their limited products.
In summary, a recessionary gap points to underperformance in the economy with high unemployment, while an inflationary gap signifies an overheated economy with rising prices. Understanding these gaps helps policymakers determine the appropriate measures to take, such as stimulus to address unemployment during a recession or tightening the money supply during times of inflation.