inflationary gap


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Related to inflationary gap: deflationary gap

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 ?
Thus the difference between money supply and real output is the actual inflationary gap, while the permissible inflationary gap is the difference between real output and double (permissible) money supply.
Recall that in Keynesian C + I + G diagrammatics, the inflationary gap is the vertical distance between the C + I + G function and the 45[degrees] line at full employment output.
Estimates of the size of the inflationary gap and therefore the threat it posed to price stability relied critically on statistics measuring income and its disposition among taxes, consumption, and saving.
Table 1 Some Basic Statistical Measures (1975-2003) CPI Monetary GDP Inflationary Inflation Growth Growth Gap * Mean 9.37 15.54 5.09 10.45 Minimum 3.10 3.60 1.70 1.50 Maximum 29.00 26.20 8.70 22.50 Range 25.90 22.60 7.00 21.00 Standard Deviation 5.92 5.97 1.90 5.70 Correlation with CPI ** 1.00 0.29 0.21 0.23 * Inflationary gap is calculated as real GDP growth rate minus monetary growth rate.
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.
Inflationary gap models assumed that inflation would lower consumption expenditures by moving income from lower-income groups to higher-income groups.
The Kumara Swamy Theorem of the Inflationary Gap has provided significant and notable explanatory power for the relationship between the growth of the money supply and real GNP within the current study in terms of direction.
At the macro level, the gap between the rates of growth of money supply and of output ("inflationary gap') was about 12 percentage points in 1994-95 as compared to the target of about 5% points for the year.
This paper empirically tests the Kumara Swamy Theorem of the Inflationary Gap for 27 European Union countries over the period 1999-2011.
Keywords: Greek economy, Portuguese economy, Inflationary gap, Inflation, Monetary policy.
This paper empirically tests the Kumara Swamy Theorem of the Inflationary Gap for the U.S.A, Canada and Mexico, the three countries that constitute the North American Free Trade Agreement (NAFTA), over the period 1997-2011.
This paper empirically tests the Kumara Swamy Theorem of Inflationary Gap for Canada over the period 1997-2011 and compares the results with Lazaridis and Livanis (2010) for the Greek and Cypriot economies.