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Which of the following statements best describes the term inflationary gap?
- a)It is the difference between the real and nominal GDP of a country.
- b)It is the difference between the current real GDP and the GDP of an economy operating at full employment.
- c)It is the difference between the GNP and GDP of a country
- d)None
Correct answer is option 'B'. Can you explain this answer?
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Which of the following statements best describes the term inflationary...
- An inflationary gap measures the difference between the current real GDP and the GDP of an economy operating at full employment. Hence option (b) is the correct answer.
- The current real GDP must be higher than the potential GDP for the gap to be considered inflationary.
- Policies that reduce an inflationary gap include reductions in government spending, tax increases, bond and securities issues, interest rate increases, and transfer payment reductions. H
- 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. 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.
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Which of the following statements best describes the term inflationary...
Definition of Inflationary Gap:
The inflationary gap refers to the difference between the current real GDP of an economy and the potential GDP that could be produced if all resources were fully employed. In other words, it is the gap between the actual output of an economy and the maximum output it could achieve without causing inflation.
Explanation:
- When an economy is operating at full employment, it is said to be at its potential GDP. At this point, all resources are fully utilized, and the economy is producing at its maximum capacity.
- However, when the real GDP exceeds the potential GDP, an inflationary gap is created. This means that the economy is producing more than it can sustain in the long run, leading to rising prices and inflation.
- The inflationary gap is typically associated with demand-pull inflation, where the aggregate demand for goods and services exceeds the economy's ability to supply them.
- Policymakers often try to close the inflationary gap by implementing contractionary monetary or fiscal policies to reduce aggregate demand and bring it back in line with the economy's potential output.
Significance:
- The inflationary gap is an important concept in macroeconomics as it helps policymakers understand the state of the economy and make informed decisions to maintain stability.
- By identifying and addressing inflationary gaps, policymakers can help prevent overheating of the economy and mitigate the negative effects of inflation on consumers and businesses.
The inflationary gap refers to the difference between the current real GDP of an economy and the potential GDP that could be produced if all resources were fully employed. In other words, it is the gap between the actual output of an economy and the maximum output it could achieve without causing inflation.
Explanation:
- When an economy is operating at full employment, it is said to be at its potential GDP. At this point, all resources are fully utilized, and the economy is producing at its maximum capacity.
- However, when the real GDP exceeds the potential GDP, an inflationary gap is created. This means that the economy is producing more than it can sustain in the long run, leading to rising prices and inflation.
- The inflationary gap is typically associated with demand-pull inflation, where the aggregate demand for goods and services exceeds the economy's ability to supply them.
- Policymakers often try to close the inflationary gap by implementing contractionary monetary or fiscal policies to reduce aggregate demand and bring it back in line with the economy's potential output.
Significance:
- The inflationary gap is an important concept in macroeconomics as it helps policymakers understand the state of the economy and make informed decisions to maintain stability.
- By identifying and addressing inflationary gaps, policymakers can help prevent overheating of the economy and mitigate the negative effects of inflation on consumers and businesses.
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Which of the following statements best describes the term inflationary gap?a)It is the difference between the real and nominal GDP of a country.b)It is the difference between the current real GDP and the GDP of an economy operating at full employment.c)It is the difference between the GNP and GDP of a countryd)NoneCorrect answer is option 'B'. Can you explain this answer?
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Which of the following statements best describes the term inflationary gap?a)It is the difference between the real and nominal GDP of a country.b)It is the difference between the current real GDP and the GDP of an economy operating at full employment.c)It is the difference between the GNP and GDP of a countryd)NoneCorrect answer is option 'B'. Can you explain this answer? for UPSC 2024 is part of UPSC preparation. The Question and answers have been prepared according to the UPSC exam syllabus. Information about Which of the following statements best describes the term inflationary gap?a)It is the difference between the real and nominal GDP of a country.b)It is the difference between the current real GDP and the GDP of an economy operating at full employment.c)It is the difference between the GNP and GDP of a countryd)NoneCorrect answer is option 'B'. Can you explain this answer? covers all topics & solutions for UPSC 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Which of the following statements best describes the term inflationary gap?a)It is the difference between the real and nominal GDP of a country.b)It is the difference between the current real GDP and the GDP of an economy operating at full employment.c)It is the difference between the GNP and GDP of a countryd)NoneCorrect answer is option 'B'. Can you explain this answer?.
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