Answer to Question #174797 in Economics of Enterprise for kris

Question

The table below shows information about the closed economy.

Real GDP (RM million) Aggregate Expenditure (RM million) 

850 880

900 920

950 960

1000 1000

1050 1040

a) If the full employment level of income is RM1, 350 million,

i) state whether the above economy is facing an inflationary gap or deflationary gap. Give your reason.

ii) what is the effect of the gap that you named in [a(i)] to the above economy.

iii) calculate the required aggregate expenditure changes needed to eliminate the inflationary gap or deflationary gap.

b) If the full employment level of income is RM850 million,

i) state whether the above economy is facing an inflationary gap or deflationary gap. Give your reason.

ii) what is the effect of the gap that you named in [b(i)] to the above economy.

iii) calculate the required aggregate expenditure changes needed to eliminate the inflationary gap or deflationary gap.

Answer 1

a) If the full employment level of income is RM1, 350 million,

i) then the above economy is facing a deflationary gap, as the equilibrium level is RM1,000.

ii) The underproduction and underemployment are the effects of the deflationary gap.

iii) The required aggregate expenditure changes needed to eliminate the deflationary gap are: 1,350 - 1,000 = RM350.

b) If the full employment level of income is RM850 million,

i) then the above economy is facing an inflationary gap, as the equilibrium level is RM1,000.

ii) The overproduction and high inflation level are the effects of the inflationary gap.

iii) The required aggregate expenditure changes needed to eliminate the inflationary gap are:

850 - 1,000 = -RM150.