A negative output gap is located where relative to the LRAS?

A negative output gap is located where relative to the LRAS?

• A. To the right of LRAS.
• B. On LRAS.
• C. To the left of LRAS.
• D. Not related to LRAS.

Answer: (C)

A negative output gap occurs when actual output is below potential output, which is where the LRAS sits. The LRAS represents the economy’s full-employment or potential production level and is drawn as a vertical line. When actual output is below that level, it lies to the left of the LRAS on the graph. That left-of-LRAS position signals underused resources and higher unemployment. If output were to the right of the LRAS, it would indicate a positive gap (actual > potential). If it were exactly on the LRAS, the gap would be zero.

A negative output gap occurs when actual output is below potential output, which is where the LRAS sits. The LRAS represents the economy’s full-employment or potential production level and is drawn as a vertical line. When actual output is below that level, it lies to the left of the LRAS on the graph. That left-of-LRAS position signals underused resources and higher unemployment. If output were to the right of the LRAS, it would indicate a positive gap (actual > potential). If it were exactly on the LRAS, the gap would be zero.