The language of output gaps - recessionary gaps and inflationary gaps - applies only to outcomes of supply shocks.

Question

Quizplus · Accepted Answer

The language of output gaps can apply to both supply shocks and demand shocks. A recessionary gap occurs when actual output is below potential output, regardless of the cause. An inflationary gap occurs when actual output is above potential output, again, regardless of the cause.

The Language of Output Gaps - Recessionary Gaps and Inflationary