Economics – Economic growth and sustainability | e-Consult
Economic growth and sustainability (1 questions)
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A positive output gap occurs when the actual level of output is greater than the economy's potential output. This typically leads to inflationary pressures as demand exceeds the economy's ability to produce goods and services. Conversely, a negative output gap occurs when the actual level of output is less than the economy's potential output. This indicates that the economy is operating below its full capacity.
Potential Consequences of a Prolonged Negative Output Gap:
- High Unemployment: A key consequence is persistent high unemployment. Businesses are not producing enough to justify employing all available workers.
- Underutilization of Resources: Factors of production such as capital, labor, and raw materials are not being fully utilized, leading to economic inefficiency.
- Reduced Tax Revenue: Lower levels of economic activity result in reduced tax revenue for the government, potentially limiting its ability to fund public services.
- Social Problems: Prolonged unemployment can lead to social problems such as poverty, crime, and social unrest.
- Deflationary Pressures: Reduced demand can lead to falling prices (deflation), which can discourage investment and further depress economic activity.