Final answer:
The output gap refers to the difference between the actual level of output in an economy and its potential level of output. It can be either negative (recessionary gap) or positive (inflationary gap).
Step-by-step explanation:
The output gap refers to the difference between the actual level of output in an economy and its potential level of output. It is a measure of how far an economy is operating below or above its capacity.
When the output gap is negative, it indicates a recessionary gap, which means the economy is producing less than its potential. This can lead to high unemployment and underutilization of resources.
On the other hand, when the output gap is positive, it indicates an inflationary gap, where the economy is producing more than its potential. This can lead to inflationary pressures.