A negative output gap happens when a country’s actual economic production is lower than its potential output. This means the economy is not performing at its maximum capability.

When this occurs, the economy faces several issues:

• Unemployed resources: Resources like workers and machinery are not being fully used.
• Economic pressure: This situation often creates deflationary pressure, leading to higher unemployment and very low inflation.

To fix this, governments often use expansionary policies to boost demand and help the economy return to its full potential.