Principles and Applications of Economics (Macro)

Distinguish Between An Inflationary Gap And A Deflationary Gap And Explain The Importance Of This Information For Policymakers When Seeking To Attain Full Employment National Income . What Are The Weaknesses Of This Analysis In an ideal economic world , all the resources present in the world that make up the factors of production are fully and efficiently employed Thus , the potential Gross Domestic Product is equal to the real Gross Domestic Product , which is the market value of all the goods and services produced in a country in a given period of time

, usually a year (Kennedy , 2002 . However , in the real world , full employment cannot be achieved - there are always resulting inflationary or deflationary gaps (Tachibanaki , 1994

INFLATIONARY GAPS

An inflationary gap exists when the aggregate demand is greater than the aggregate supply when the aggregate demand exceeds the production potential which is the Gross Domestic Product or when the equilibrium level of national income is above the level of full employment . The aggregate demand is the summation of the consumption expenditure investment , net exports (exports minus imports , and government expenditure . When the demand goes really high and cannot be fulfilled by the amount of goods and services available in the market , the market does not remain in equilibrium . In to make sure the market comes back to equilibrium , the prices of goods and services and risen so that the purchasing power of people reduces and people start consuming and demanding less . The lower level of demand can now...