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 ?
TESTING OF THE KUMARA SWAMY THEOREM OF INFLATIONARY GAP IN SELECTED COUNTRIES AND TRADE BLOCS
In order to explain the relationship between these variables, Professor M.R Kumara Swarny 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.
Turkey stands out due to numerous large excess inflationary gaps with the first group appearing with increasing magnitudes in the first three years of our time series.
The analysis indicates stable performance for all members in the latter period of the current study, though excess inflationary gaps have risen slightly in 2012.
The Scandinavian countries display results above and below the benchmark in a similar pattern of year-to-year variation, resulting in negative excess inflationary gaps on average.
Estonia experienced moderately large swings due to its small size, with large excess inflationary gaps in the final years leading up to its adoption of the Euro in 2011.
Keywords: Greek economy, Portuguese economy, Inflationary gap, Inflation, Monetary policy.
Such a money supply growth rate is termed as "permissible money supply" and the difference between this and real output growth as "permissible inflationary gap".
Keywords: Inflationary gap, N.A.F T.A., Kumara Swamy Theorem
In 1978, Professor M.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.
Keywords: Inflationary Gap; Canada; Confounding factors
In order to explain the relationship between these variables, Professor M.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.