Inflationary Gap
Definition
An inflationary gap occurs when the actual level of output in an economy exceeds its potential level, leading to rising prices and increased inflation.
Analogy
Picture a popular restaurant with limited seating capacity. On a busy night, more customers show up than there are available seats, causing overcrowding and longer wait times. This situation represents an inflationary gap where demand exceeds supply, leading to higher prices.
Related terms
Aggregate Supply: The total amount of goods and services that producers are willing and able to supply at different price levels.
Monetary Policy: Actions taken by central banks to control money supply, interest rates, and credit availability in order to influence economic conditions.
Cost-Push Inflation: A type of inflation caused by increases in production costs such as wages or raw materials.
"Inflationary Gap" appears in:
Study guides (5)
Additional resources (1)
Practice Questions (6)
Which of the following is a characteristic of an inflationary gap in the economy?
Which of the following would create an inflationary gap?
Which definition best represents an inflationary gap?
How may an inflationary gap affect consumers and purchases?
What happens to unemployment levels in an inflationary gap?
What happened to the United States economy in 2006 during the inflationary gap?
Resources
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