How Output Gaps Relate to Unemployment & Inflation
- Understanding the relationship between output gaps, unemployment, and inflation is crucial for policymakers
- Reducing a negative output gap by stimulating demand may lead to lower unemployment but could also contribute to inflation
- Conversely, efforts to cool down an overheating economy with a positive output gap might reduce inflation but could result in higher unemployment
Relationship Between Output gaps & Unemployment / Inflationary Pressures
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Low unemployment |
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Low and stable inflation |
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