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Consider the following statements withrespect to Inflationary Gap:
1. It is the gap between GDP growth rates oftwo consecutive years.
2. In this condition, the potential GDP mustbe higher than the current real GDP.
3. Reduction in government spending couldhelp reducing this gap.
Which of the statements given above is/arecorrect?
1. It is the gap between GDP growth rates oftwo consecutive years.
2. In this condition, the potential GDP mustbe higher than the current real GDP.
3. Reduction in government spending couldhelp reducing this gap.
Which of the statements given above is/arecorrect?
- a)1 and 2 only
- b)3 only
- c)2 and 3 only
- d)1, 2 and 3
Correct answer is option 'B'. Can you explain this answer?
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Most Upvoted Answer
Consider the following statements withrespect to Inflationary Gap:1. I...
Explanation:
The correct answer is option 'B' - 3 only.
Statement 1: It is the gap between GDP growth rates of two consecutive years.
This statement is incorrect. The inflationary gap is not related to the GDP growth rates of two consecutive years. It is a macroeconomic concept that represents the difference between the actual level of real GDP and the potential level of real GDP.
Statement 2: In this condition, the potential GDP must be higher than the current real GDP.
This statement is incorrect. In an inflationary gap, the current real GDP exceeds the potential GDP. It occurs when the economy is operating above its full employment level and resources are being overutilized. This leads to increases in prices and inflationary pressures.
Statement 3: Reduction in government spending could help reduce this gap.
This statement is correct. Reduction in government spending can help reduce the inflationary gap. When the government reduces its spending, it decreases the aggregate demand in the economy. This leads to a decrease in the overall level of economic activity and can help bring the economy back to its potential level of output. By reducing government spending, the government can help reduce the overutilization of resources and alleviate inflationary pressures.
Summary:
In conclusion, the correct statement is option 'B' - 3 only. The inflationary gap is the difference between the actual level of real GDP and the potential level of real GDP. It occurs when the current real GDP exceeds the potential GDP, and reduction in government spending can help reduce this gap.
The correct answer is option 'B' - 3 only.
Statement 1: It is the gap between GDP growth rates of two consecutive years.
This statement is incorrect. The inflationary gap is not related to the GDP growth rates of two consecutive years. It is a macroeconomic concept that represents the difference between the actual level of real GDP and the potential level of real GDP.
Statement 2: In this condition, the potential GDP must be higher than the current real GDP.
This statement is incorrect. In an inflationary gap, the current real GDP exceeds the potential GDP. It occurs when the economy is operating above its full employment level and resources are being overutilized. This leads to increases in prices and inflationary pressures.
Statement 3: Reduction in government spending could help reduce this gap.
This statement is correct. Reduction in government spending can help reduce the inflationary gap. When the government reduces its spending, it decreases the aggregate demand in the economy. This leads to a decrease in the overall level of economic activity and can help bring the economy back to its potential level of output. By reducing government spending, the government can help reduce the overutilization of resources and alleviate inflationary pressures.
Summary:
In conclusion, the correct statement is option 'B' - 3 only. The inflationary gap is the difference between the actual level of real GDP and the potential level of real GDP. It occurs when the current real GDP exceeds the potential GDP, and reduction in government spending can help reduce this gap.
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Consider the following statements withrespect to Inflationary Gap:1. I...
What Is an Inflationary Gap?
An inflationary gap is a macroeconomic concept that measures the difference between the current level of real gross domestic product (GDP) and the GDP that would exist if an economy was operating at full employment. Hence, statement 1 is not correct.
KEY TAKEAWAYS
An inflationary gap is a macroeconomic concept that measures the difference between the current level of real gross domestic product (GDP) and the GDP that would exist if an economy was operating at full employment. Hence, statement 1 is not correct.
KEY TAKEAWAYS
- An inflationary gap measures the difference between the current level of real GDP and the GDP that would exist if an economy was operating at full employment.
- For the gap to be considered inflationary, the current real GDP must be higher than the potential GDP. Hence, statement 2 is not correct.
- Policies that can reduce an inflationary gap include reductions in government spending, tax increases, bond and securities issues, interest rate increases, and transfer payment reductions.
Hence, statement 3 is correct.
- An 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 elevated government expenditure.
- Against this backdrop, the real GDP can exceed the potential GDP, resulting in an inflationary gap. The inflationary gap is named as such because the relative rise in real GDP causes an economy to increase its consumption, leading prices to climb in the long run.
- The inflationary gap represents the point in the business cycle when the economy is expanding. Due to the higher number of funds available within the economy, consumers are more inclined to purchase goods and services. As demand for goods and services increases but production has not yet compensated for the shift, prices rise to restore market equilibrium.
- When the potential GDP is higher than the real GDP, the gap is instead referred to as a deflationary gap.
- The other type of output gap is the recessionary gap, which describes an economy operating below its full-employment equilibrium.
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Consider the following statements withrespect to Inflationary Gap:1. It is the gap between GDP growth rates oftwo consecutive years.2. In this condition, the potential GDP mustbe higher than the current real GDP.3. Reduction in government spending couldhelp reducing this gap.Which of the statements given above is/arecorrect?a)1 and 2 onlyb)3 onlyc)2 and 3 onlyd)1, 2 and 3Correct answer is option 'B'. Can you explain this answer?
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