Question

What are inflationary and deflationary gaps? Used money and goods market diagrams to illustrate how monetary policy can be used to close an inflationary gap.

Answer 1

Inflationary gap refers to the disparity between the inflation -corrected Gross Domestic Product and the value that the Gross Domestic Product could possibly attain when there is full employment

Deflationary gap is a condition where the the inflation- corrected Gross Domestic Product is below the production capacity of the economy.