What are the reason of inflationary gap?

Question

Answer

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. Due to the higher number of funds available within the economy, consumers are more inclined to purchase goods and services

Answer

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. ... When the potential GDP is higher than the real GDP, the gap is referred to as a deflationary gap.Feb 22, 2018.......

Answer

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. ... When the potential GDP is higher than the real GDP, the gap is referred to as a deflationary gap.

Answer

Reasons for Inflationary Gap

Inflationary gap occurs when the actual output or GDP exceeds the potential output. This situation arises when there is excessive demand in the economy, which leads to an increase in prices and inflation. Here are some of the reasons why an inflationary gap occurs:

Increased consumer spending: When consumers have more disposable income, they tend to spend more. This leads to an increase in demand for goods and services, which can create an inflationary gap.

Government spending: When the government spends more money, it can lead to an increase in demand for goods and services. This can create an inflationary gap if the economy is already operating at full capacity.

Low-interest rates: When interest rates are low, it is easier for consumers and businesses to borrow money. This can lead to an increase in spending and demand for goods and services, which can create an inflationary gap.

Increased exports: When a country's exports increase, it can lead to an increase in demand for goods and services. This can create an inflationary gap if the economy is already operating at full capacity.

Supply-side shocks: When there is a disruption in the supply of goods and services, it can lead to an increase in prices and inflation. This can create an inflationary gap if the economy is already operating at full capacity.

It is important to note that an inflationary gap can have negative consequences for the economy, such as higher prices, reduced purchasing power, and a decrease in real GDP. Therefore, policymakers need to take measures to address the factors that contribute to an inflationary gap, such as increasing interest rates, reducing government spending, and encouraging savings.

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