inflationary gap

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Inflationary Gap

A situation in which the real GDP (GDP adjusted for inflation) exceeds the potential for what the economy can actually produce. This occurs when demand for products exceeds the labor or other resources required to produce them. Ultimately, this leads to demand-pull inflation.
Inflationary gapclick for a larger image
Fig. 94 Inflationary gap. (a) the AGGREGATE SUPPLY SCHEDULE is drawn as a 45-degree line because businesses will offer any particular level of output only if they expect total spending (aggregate demand) to be just sufficient to sell all that output. However, once the economy reaches the full employment level of national income (OY1 ), then output cannot expand further and at this level of output the aggregate supply schedule becomes vertical. If aggregate demand was at the level indicated by AD, the economy would be operating at full employment without inflation (at point E). However, if aggregate demand was at a higher level like AD1 this excess aggregate demand would create an inflationary gap (equal to EG), pulling price upward.

(b) Alternatively, where aggregate demand and aggregate supply are expressed in terms of real national income and price levels, an inflationary gap shows up as the difference between the price level (OP) corresponding to the full employment level of aggregate demand (AD) and the price level (OP1) corresponding to the higher level of aggregate demand (AD1) at real national income level OY 1. See DEMAND-PULL INFLATION.

inflationary gap

the excess of total spending (AGGREGATE DEMAND) at the full employment level of national income (POTENTIAL GROSS NATIONAL PRODUCT). As it is not possible to increase output further, the excess demand will cause prices to rise, that is, real output remains the same but the money or nominal value of that output will be inflated. To counter this excess spending, the authorities can use FISCAL POLICY and MONETARY POLICY to reduce aggregate demand.
References in periodicals archive ?
The recent EU members that have not adopted the Euro follow in succession with average excess inflationary gaps less than 10 per cent but above the average rates of inflation.
The majority of the G-20 countries have higher excess inflationary gaps than the NAFTA members.
Immediately after the circulation of the Euro as the de facto currency, Germany and France have positive excess inflationary gaps in 2003-2003, as described in Glew, Bauer, and Faseruk (2013).
China stands out due to its constrained money supply relative to GNI, providing negative excess inflationary gaps in all years except 2009, when it spikes above both India and Brazil despite maintaining positive real GNI growth.
Table 3 provides the excess inflationary gaps for the initial 15 EU members and Norway, calculated as described above.
Germany, Finland and France have positive excess inflationary gaps in 2002-2003 and 2005.
However, when inflationary gaps are calculated on the basis of [M.
Keywords: Greek economy, Portuguese economy, Inflationary gap, Inflation, Monetary policy.
R Kumara Swamy proposed the unique and well-researched Kumara Swamy Theorem of Inflationary Gap during the convocation lecture on 'Inflation and Economic Development of Nigeria' delivered at the Institute of Management and Technology, Enugu, Nigeria on March 3, 1978, which states.
Lazaridis and Livanis investigated the Kumara Swamy Theorem of Inflationary Gap for the Cypriot and Greek economies over the period 2004-2009 and found favorable results for the Kumara Swamy Theorem of Inflationary Gap.
R Kumara Swamy proposed the unique and well-researched Kumara Swamy Theorem of Inflationary Gap in his convocation lecture on Inflation and Economic Development of Nigeria delivered at the Institute of Management and Technology, Enugu, Nigeria on March 3, 1978.
In many instances the persistence of inflation is exacerbated by policy makers that enact policies designed to control core inflation without adequate knowledge of the permissible inflationary gap and the excess inflationary gap, demonstrated in the Kumara Swamy Theorem of Inflationary Gap (Swamy (6&7)).