What Is Inflationary Gap?


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Mahwash Marcel answered
Inflationary gap is the difference between the level of income above the full employment and that level of income at full employment. In other words, inflationary gap is represented by the difference between the nominal income and the real income when the economy operates beyond the level of full employment.

Inflationary gap develops when the economy begins to operate beyond the level of full employment and it is widened as the level of operation of the economy is further pushed up beyond the full employment level. The gap once created gives rise to inflationary trend prices. The smooth working of the economy is disturbed. The Government then takes corrective measures to cover up the gap.

When inflationary gap is created, the real income or the value of output lags behind the money income. It so happens because the size of output of the real income remains stationary and it does not vary as the nominal income varies. At the level of full employment, no idle resources are left to be employed to range the level of output. The money income, of course, rises in the sense that the same size of output reaches a bigger size of money income because the rise in process.

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