Inflationary gap

Inflationary gap,

Definition of Inflationary gap:

  1. A description of a condition that arises in an economy of the difference between a countrys real gross domestic product (GDP) and the level of GDP with full employment in the economy. The inflationary gap is so named because a rise in the level of an economys GDP will cause an increase in consumption leading to higher prices.

  2. An inflationary gap is a macroeconomic concept that measures the difference between the current level of real GDP and the gross domestic product (GDP) that would exist if an economy was operating at full employment.

  3. The 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 increased government expenditure. This can lead to the real GDP exceeding the potential GDP, resulting in an inflationary gap. 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. Key point to note is that for the gap to be considered inflationary, the current real GDP must be the higher than the economy-at-full-employment GDP (also known as potential GDP).

How to use Inflationary gap in a sentence?

  1. When measuring the state of a nations economy, investors cannot forget to take the inflationary gap into consideration before determining where best to place their funds.
  2. Government fiscal policies that can reduce inflationary gap include reductions in government spending, tax increases, bond and securities issues, interest rate increases, and transfer payment reductions.
  3. The inflationary gap was mentioned in the meeting as we were expecting an increase in employment so we could bridge the gap soon.
  4. You need to understand how the inflationary gap will work and try to find any ways to use it to your advantage.
  5. Key point to note is that for the gap to be considered inflationary, the current real GDP must be the higher than the potential GDP.
  6. An inflationary gap is a macroeconomic concept that measures the difference between the current level of real GDP and the gross domestic product (GDP) that would exist if an economy was operating at full employment.

Meaning of Inflationary gap & Inflationary gap Definition