AGGREGATE DEMAND AND SUPPLY 1

Aggregate demand and supply

Name of student

Institution affiliation
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Aggregate demand and supply

An output gap is a difference between the actual economic output and maximum

potential economic output. The U. S’s economy presents a Positive output gap or inflationary

gap because there is an economic boom. The economy attempts to recover from the negative

impact of the Covid-19 pandemic. The labor costs and prices of goods are increasing in response

to the increased economic demand. On the other hand, businesses and employees are trying to

increase efficiency and output to meet the increasing demand. The labor market is flooded (high

labor demand) as people are looking for work following job losses amidst the pandemic. The

capital utilization rates by the Fed decreased to 76.50% in December 2021 from 76.60% in

November 2021. It is an indicator that the overall economy is experiencing an inflationary gap.

Sources:

https://tradingeconomics.com/united-states/capacity-utilization

https://www.bls.gov/bls/newsrels.htm#OEUS

https://www.federalreserve.gov/
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Responses:

Hi Dena,

The topic (aggregate demand/supply and output gap) is important to us because it enlightens us

on the dynamics of a typical economy. All the things we learn in theory we get to see them

manifesting in the US economy. You have provided well-detailed statistics on the output gap,

labor force, and capital utilization by the Fed. The graph illustration depicts the positive

(inflationary)output which is a good indicator that the economy is recovering in the right

direction. According to US Capacity utilization (2022), there is a high possibility that by the end

of 2022 the economy will have regained full momentum to neutralize the negative impact of the

pandemic.

References:

Trading economics. (2022). US capacity utilization. Retrieved 16 February 2022, from

https://tradingeconomics.com/united-states/capacity-utilization

Hi Hadassah,

The topic is of interest to us because it enlightens us on some of the expectations of the US

economy. With a positive (inflationary) gap, the country is experiencing a high economic

demand; thus, employees and companies should increase their efficiency to meet the increasing

demand. The labor market has not yet reached the equilibrium employment rate; thus, the need

for creating more jobs for the unemployed (Carlsson-Szlezak et al., 2020). Therefore, I think that
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the economy is still in the recovery process characterized by high-interest rates, inflated cost of

goods and services are high while consumer rate is still low. In a nutshell, the economic shock

from the pandemic has led to the positive/ inflationary output gap.

References:

Carlsson-Szlezak, P., Reeves, M., and Swartz P. (2020). Understanding the economic shock of

Coronavirus. Harvard Business Review. Retrieved 16 February 2022, from

https://hbr.org/2020/03/understanding-the-economic-shock-of-coronavirus