A positive output gap happens when a country’s actual economic production is higher than its potential output. This means the economy is working beyond its long-term sustainable limits.

Key characteristics include:

• Inflationary pressure: Because consumer demand is greater than what businesses can supply, prices for goods and services tend to rise.
• Economic booms: This situation usually occurs during periods of rapid growth when aggregate demand is very strong.
• Policy response: Government officials or central banks may use contractionary policies (such as raising interest rates) to cool down the economy and bring production back to a sustainable level.