Compare and contrast the recessionary expenditure gap and the inflationary expenditure gap.
What will be an ideal response?
A recessionary expenditure gap is the amount by which aggregate expenditures fall short of the noninflationary full-employment level of GDP. Real GDP will be below full-employment real GDP by a multiple amount of the recessionary expenditure gap. An inflationary expenditure gap, on the other hand, is the amount by which aggregate expenditures exceeds the noninflationary full-employment level of GDP. This gap will cause demand-pull inflation as nominal GDP rises to meet the higher level of aggregate expenditures, but real GDP is already at its full-employment level.
You might also like to view...
In the two-period model with asymmetric information, the presence of bad borrowers who always default
A) makes good borrowers better off. B) matters only for the loan interest rate faced by bad borrowers. C) affects the equilibrium profits of banks. D) affects good borrowers adversely.
Given full-employment output = $2,800, equilibrium real GDP = $2,500, and MPS = 0.25, which of the following changes would most likely bring the economy to a full-employment level of real GDP?
a. $300 decrease in taxes. b. $75 increase in government spending. c. $75 decrease in taxes. d. $300 increase in government spending. e. $75 decrease in government spending.