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Consider the following statements with reference to Inflationary Gap:
It is the measure of the difference between the current level of real GDP and the GDP of the economy operating at full employment level.
Inflationary gap is the result of a deficiency in demand.
Which of the statements given above is/are correct?
- a)1 only
- b)2 only
- c)Both 1 and 2
- d)Neither 1 nor 2
Correct answer is option 'C'. Can you explain this answer?
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Consider the following statements with reference to Inflationary Gap:...
Inflationary Gap
Definition:
- The inflationary gap is the difference between the current level of real GDP and the GDP of the economy operating at full employment level.
Factors contributing to Inflationary Gap:
- A deficiency in supply or an increase in demand can contribute to an inflationary gap.
- If there is insufficient supply to meet demand, then prices will rise, leading to inflation.
- If demand is too high, firms will raise prices to take advantage of the situation, leading to inflation.
Effects of Inflationary Gap:
- Inflationary gap can lead to an overheating of the economy, leading to higher prices and a deterioration of the balance of trade.
- The government may intervene to reduce the inflationary gap by increasing taxes or reducing spending.
Conclusion:
- Inflationary gap is a measure of the difference between the current level of real GDP and the GDP of the economy operating at full employment level.
- It is caused by a deficiency in demand or a shortage of supply.
- The effects of inflationary gap can be damaging to the economy, and the government may intervene to reduce it.
Definition:
- The inflationary gap is the difference between the current level of real GDP and the GDP of the economy operating at full employment level.
Factors contributing to Inflationary Gap:
- A deficiency in supply or an increase in demand can contribute to an inflationary gap.
- If there is insufficient supply to meet demand, then prices will rise, leading to inflation.
- If demand is too high, firms will raise prices to take advantage of the situation, leading to inflation.
Effects of Inflationary Gap:
- Inflationary gap can lead to an overheating of the economy, leading to higher prices and a deterioration of the balance of trade.
- The government may intervene to reduce the inflationary gap by increasing taxes or reducing spending.
Conclusion:
- Inflationary gap is a measure of the difference between the current level of real GDP and the GDP of the economy operating at full employment level.
- It is caused by a deficiency in demand or a shortage of supply.
- The effects of inflationary gap can be damaging to the economy, and the government may intervene to reduce it.
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Community Answer
Consider the following statements with reference to Inflationary Gap:...
- An inflationary gap is a macroeconomic concept that measures the difference between the current level of real GDP and the gross domestic product (GDP) that would exist if an economy was operating at full employment. Hence, statement 1 is correct.
- The inflationary gap exists when the demand for goods and services exceeds production due to factors such as higher levels of overall employment, increased trade activities or increased government expenditure. Inflationary gap is thus the result of excess demand. It may be defined as the excess of planned levels of expenditure over the available output at base prices. Hence, statement 2 is not correct.
- This can lead to the real GDP exceeding the potential GDP, resulting in an inflationary gap. The inflationary gap is so named because the relative increase in real GDP causes an economy to increase its consumption, which causes prices to rise in the long run.
- Deflationary gap is the difference between potential output at full level of employment and the actual level of output of the economy. For deflationary gap all the resources of the economy are not being used to the optimum level and some are idle. This comes with unemployment and low levels of output.
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Consider the following statements with reference to Inflationary Gap: It is the measure of the difference between the current level of real GDP and the GDP of the economy operating at full employment level. Inflationary gap is the result of a deficiency in demand. Which of the statements given above is/are correct?a)1 onlyb)2 onlyc)Both 1 and 2d)Neither 1 nor 2Correct answer is option 'C'. Can you explain this answer?
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