EC202 1nd Edition Lecture 21 Outline of Last Lecture I. Characteristics of fluctuationsOutline of Current Lecture II. Potential outputIII. RecessionIV. Output gapCurrent Lecture-potential output or potential real GDP-aka full employment output-the amount of output (real GDP) that an economy can produce when using its resources, such as capital and labor, at normal rates-there are no overall shortages or surpluses-the inflation rate should not increase or decrease-grows over time-a recession occurs when the economy is growing significantly below its normal rate-two possibilities:-1. actual output equals potential output, but potential output is growing slowly-appropriate policy responses include long-run solutions to be discussed later-promote saving, investment, technological innovation, human capital formation-2. actual output falls below potential output (i.e., a recessionary gap)These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.-the analysis to follow in this and subsequent sections is designed to provide a discussion of stabilization policy to return actual output to potential output-output gap: (Y* - Y )-the difference between the economy’s potential output and its actual output at a given point in time-Y is actual real GDP-Y* is potential real
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