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Over the last ten years the output gap (the estimated
difference between actual and potential GDP) has remained
very low helping to control any demand-pull inflationary
pressure in the economy. The chart above shows that following
the last recession, the output gap was negative with actual
GDP well below potential (i.e. there was plenty of spare
capacity to meet increases in aggregate demand). By the late
1990s, this output gap had eroded but the Bank of England
has striven to keep the growth of AD close to the long term
trend rate of growth and it seems to have reasonably successful
in this ambition. The output gap turned negative in 2002
following a slowdown in real GDP growth.