{"id":31955,"date":"2021-09-27T13:12:01","date_gmt":"2021-09-27T13:12:01","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=31955"},"modified":"2026-03-30T05:58:22","modified_gmt":"2026-03-30T05:58:22","slug":"long-run-full-employment-recessionary-gap-inflationary-gap-and-stagflation","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/long-run-full-employment-recessionary-gap-inflationary-gap-and-stagflation\/","title":{"rendered":"Long-run Full Employment, Recessionary Gap, Inflationary Gap, and Stagflation"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"VideoObject\",\n  \"name\": \"Aggregate Output, Prices, And Economic Growth (2022 Level I CFA\u00ae Exam \u2013 Reading 10)\",\n  \"description\": \"This video looks into CFA Level 1 Economics, covering key concepts such as GDP calculation (income and expenditure approaches), aggregate supply and demand, IS-LM models, and economic growth factors. It explores inflation, stagflation, business cycles, and production functions, emphasizing their relevance in macroeconomic analysis and decision-making.\",\n  \"uploadDate\": \"2018-11-06T00:00:00+00:00\",\n  \"thumbnailUrl\": \"https:\/\/img.youtube.com\/vi\/cRMasYNNsVA\/maxresdefault.jpg\",\n  \"contentUrl\": \"https:\/\/www.youtube.com\/watch?v=cRMasYNNsVA\",\n  \"embedUrl\": \"https:\/\/www.youtube.com\/embed\/cRMasYNNsVA\",\n  \"duration\": \"PT34M44S\"\n}\n<\/script>\n\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"ImageObject\",\n  \"url\": \"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/16l-j.png\",\n  \"caption\": \"Image showing long run full employment.\",\n  \"width\": 974,\n  \"height\": 787,\n  \"copyrightNotice\": \"\u00a9 2024 AnalystPrep\",\n  \"acquireLicensePage\": \"https:\/\/analystprep.com\/license-info\",\n  \"creditText\": \"AnalystPrep Design Team\",\n  \"creator\": {\n    \"@type\": \"Organization\",\n    \"name\": \"AnalystPrep\"\n  }\n}\n<\/script>\n\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"ImageObject\",\n  \"url\": \"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/Short-run-recessionary-gap1.png\",\n  \"caption\": \"Image of the short run recessionary gap.\",\n  \"width\": 974,\n  \"height\": 787,\n  \"copyrightNotice\": \"\u00a9 2024 AnalystPrep\",\n  \"acquireLicensePage\": \"https:\/\/analystprep.com\/license-info\",\n  \"creditText\": \"AnalystPrep Design Team\",\n  \"creator\": {\n    \"@type\": \"Organization\",\n    \"name\": \"AnalystPrep\"\n  }\n}\n<\/script>\n\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"ImageObject\",\n  \"url\": \"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/short-run-inflationary-gap.png\",\n  \"caption\": \"Image showing the short run inflationary gap.\",\n  \"width\": 974,\n  \"height\": 787,\n  \"copyrightNotice\": \"\u00a9 2024 AnalystPrep\",\n  \"acquireLicensePage\": \"https:\/\/analystprep.com\/license-info\",\n  \"creditText\": \"AnalystPrep Design Team\",\n  \"creator\": {\n    \"@type\": \"Organization\",\n    \"name\": \"AnalystPrep\"\n  }\n}\n<\/script>\n\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"ImageObject\",\n  \"url\": \"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/16o-j.png\",\n  \"caption\": \"Image of the short run stagflation.\",\n  \"width\": 974,\n  \"height\": 787,\n  \"copyrightNotice\": \"\u00a9 2024 AnalystPrep\",\n  \"acquireLicensePage\": \"https:\/\/analystprep.com\/license-info\",\n  \"creditText\": \"AnalystPrep Design Team\",\n  \"creator\": {\n    \"@type\": \"Organization\",\n    \"name\": \"AnalystPrep\"\n  }\n}\n<\/script>\n\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"Which of the following is the most accurate statement regarding short-run stagflation?\",\n    \"text\": \"Which of the following is the most accurate statement regarding short-run stagflation?\\n\\nA. Stagflation is caused by a fall in the short-run aggregate supply.\\n\\nB. Stagflation occurs when the short-run level of equilibrium GDP of the economy is above the potential GDP.\\n\\nC. Stagflation occurs when the aggregate demand (AD) curve intersects the short-run aggregate supply curve (SRAS) at a point on the long-run aggregate supply curve (LRAS).\",\n    \"answerCount\": 3,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"The correct answer is A. A decline in short-run aggregate supply leads to stagflation, which is characterized by both high unemployment and high inflation.\"\n    }\n  }\n}\n<\/script>\n\n\n\n<p><iframe loading=\"lazy\"\n  width=\"611\"\n  height=\"344\"\n  src=\"https:\/\/www.youtube.com\/embed\/XDs9kjMPKTo\"\n  title=\"YouTube video player\"\n  frameborder=\"0\"\n  allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\"\n  referrerpolicy=\"strict-origin-when-cross-origin\"\n  allowfullscreen>\n<\/iframe>\n<\/p>\n<h2 style=\"text-align: left;\"><strong>Long-run Full Employment<\/strong><\/h2>\n<p>Long-run full employment equilibrium occurs when the aggregate demand (AD) curve cuts the short-run aggregate supply curve (SRAS) at a point on the long-run aggregate supply curve (LRSS):<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter size-full wp-image-10180\" src=\"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/16l-j.png\" alt=\"long-run-full-employment\" width=\"974\" height=\"787\" srcset=\"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/16l-j.png 974w, https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/16l-j-300x242.png 300w, https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/16l-j-768x621.png 768w, https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/16l-j-400x323.png 400w\" sizes=\"auto, (max-width: 974px) 100vw, 974px\" \/><\/p>\n<p>Since the intersection occurs at a point on the LRSS, the economy operates at potential GDP. Contrary to the inflationary gap, it is characterized by the following factors: capital and labor are fully employed, and jobs are available to everyone in the economy. Eventually, in the long run, potential GDP and equilibrium GDP are both equal.<\/p>\n<div style=\"margin:20px 0\">\n<a href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\"\nstyle=\"display:block;width:100%;text-align:center;padding:10px;border:2px solid #2f5bea;border-radius:40px;font-size:16px;color:#2f5bea;text-decoration:none\">\nPractice macroeconomics gap analysis with our free trial.\n<\/a>\n<\/div>\n<h3><strong>Potential GDP<\/strong><\/h3>\n<p>Potential gross domestic product (GDP) is a theoretical concept in which resources are allocated optimally with no distortions. For example, every worker is matched with the perfect job for his skill level; every good idea is implemented, etc.<\/p>\n<p>It is difficult to measure potential GDP with accuracy. The economy rarely operates at potential GDP because of changes arising from shifts in the aggregate demand curve and the short-run aggregate supply curve.<\/p>\n<p>However, economists expect that the long-run growth rate of potential GDP can be approximated by constructing measures of the trend in actual GDP that smooth out business cycle fluctuation.<\/p>\n<h2><strong>Short\u2013run Recessionary Gap<\/strong><\/h2>\n<p>A recession gap occurs when the aggregate demand curve intersects the short-run aggregate supply curve at a point to the left of the long-term aggregate supply.<\/p>\n<h2><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter size-full wp-image-16920\" src=\"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/Short-run-recessionary-gap1.png\" alt=\"Short-run-recessionary-gap\" width=\"974\" height=\"787\" srcset=\"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/Short-run-recessionary-gap1.png 974w, https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/Short-run-recessionary-gap1-300x242.png 300w, https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/Short-run-recessionary-gap1-768x621.png 768w, https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/Short-run-recessionary-gap1-400x323.png 400w\" sizes=\"auto, (max-width: 974px) 100vw, 974px\" \/><\/h2>\n<p>A shift to the left side of the aggregate demand curve or a decline in quantity demanded leads to lower prices and, hence, a lower GDP. This brings economic contractions, and if such declines drive demand below the potential GDP of the economy, the economy goes into recession. Companies will then tend to reduce their workforce hence raising the rate of unemployment.<\/p>\n<h2><strong>Short-run Inflationary Gap<\/strong><\/h2>\n<p>A short-run inflationary gap occurs when the short-run level of equilibrium GDP lies above the potential GDP.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter size-full wp-image-16921\" src=\"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/short-run-inflationary-gap.png\" alt=\"short-run-inflationary-gap\" width=\"974\" height=\"787\" srcset=\"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/short-run-inflationary-gap.png 974w, https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/short-run-inflationary-gap-300x242.png 300w, https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/short-run-inflationary-gap-768x621.png 768w, https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/short-run-inflationary-gap-400x323.png 400w\" sizes=\"auto, (max-width: 974px) 100vw, 974px\" \/><\/p>\n<p>This leads to an upward rise in prices. Due to an increase in aggregate demand, companies will tend to increase their production and employ more workers. As the economy attains its potential GDP, companies pay more wages and other input prices to increase production.<\/p>\n<h2><strong>Short-run Stagflation<\/strong><\/h2>\n<p>Fluctuations in the short-run aggregate supply cause short-run stagflation. A fall in aggregate supply leads to stagflation, characterized by high unemployment (\u201cstagnation\u201d) and a high inflation rate.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter size-full wp-image-10183\" src=\"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/16o-j.png\" alt=\"short-run-stagflation\" width=\"974\" height=\"787\" srcset=\"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/16o-j.png 974w, https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/16o-j-300x242.png 300w, https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/16o-j-768x621.png 768w, https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/16o-j-400x323.png 400w\" sizes=\"auto, (max-width: 974px) 100vw, 974px\" \/><\/p>\n<blockquote>\n<h2><strong>Question<\/strong><\/h2>\n<p>Which of the following is the <em>most <\/em>accurate statement regarding short-run stagflation?<\/p>\n<ol style=\"list-style-type: upper-alpha;\">\n<li>Stagflation is caused by a fall in the short-run aggregate supply.<\/li>\n<li>Stagflation occurs when the short-run level of equilibrium GDP of the economy is above the potential GDP.<\/li>\n<li>Stagflation occurs when the aggregate demand (AD) curve intersects the short-run aggregate supply curve (SRAS) at a point on the long-run aggregate supply curve (LRSS).<\/li>\n<\/ol>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is <strong>A<\/strong>.<\/p>\n<p>A decline in the short-run aggregate supply will lead to stagflation, which is characterized by&nbsp;both high unemployment and high inflation.<\/p>\n<\/blockquote>\n<div class=\"notes_inv\"><hr>\n<p><a href=\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/learning-sessions-curriculum-economics\/\"><em>Economics &#8211; Learning Sessions<\/em><\/a><\/p>\n<\/div>\n<div style=\"text-align:center;margin:40px 0\">\n<a href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\"\nstyle=\"display:inline-block;padding:10px 26px;background:#3f78d7;color:#fff;border-radius:40px;font-size:16px;text-decoration:none\">\nStart Free Trial \u2192\n<\/a>\n<p style=\"margin-top:10px;max-width:600px;margin-left:auto;margin-right:auto;font-size:14px\">\nSolve CFA-style macroeconomics questions on GDP gaps and long-run equilibrium.\n<\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>Long-run Full Employment Long-run full employment equilibrium occurs when the aggregate demand (AD) curve cuts the short-run aggregate supply curve (SRAS) at a point on the long-run aggregate supply curve (LRSS): Since the intersection occurs at a point on the&#8230;<\/p>\n","protected":false},"author":15,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[4],"tags":[],"class_list":["post-31955","post","type-post","status-publish","format-standard","hentry","category-economics","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Inflationary vs Recessionary Gaps | CFA Level 1 Economics<\/title>\n<meta name=\"description\" content=\"Learn about inflationary gap vs recessionary gap, examine recessionary gap graphs, and understand their impact on the economy for CFA Level 1.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" 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