Answer to Question #236839 in Macroeconomics for Bawa

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.