ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The difference between the level of real GDP and potential GDP is known as the output gap. When the output gap is positive-when GDP is higher than potential-the economy is operating above its sustainable capacity and is likely to generate inflation.

Detailed explanation-2: -Inflationary Gap = Real or Actual GDP – Anticipated GDP The real GDP must be higher than the potential GDP for the gap to be considered inflationary. When the potential GDP is higher than the real GDP, the gap is instead referred to as a deflationary gap.

Detailed explanation-3: -Thus, the quantity theory of money states that when real GDP equals potential GDP, an increase in the quantity of money brings an equal percentage increase in the price level.

Detailed explanation-4: -Inflationary Gap = Real or Actual GDP – Anticipated GDP While the inflationary gap is one, the recessionary gap is the other. An inflationary gap can be understood as the measure of excess aggregate demand over aggregate potential demand during full employment.

Detailed explanation-5: -If real GDP falls short of potential GDP (i.e., if the output gap is negative), it means demand for goods and services is weak. It’s a sign that the economy may not be at full employment.