According to economic theory, an inflationary gap occurs when actual output exceeds full employment level of output. How can this be possible? How can actual output be more than the productive capacity of an economy?
Keynesian economics is a collection of macroeconomic theories influenced by the observations of John Maynard Keynes on aggregate demand and recessions. Keynes lived during the Great Depression and observed that a main prediction of classical economics was not really holding up. Classical economics predicted that the economy will adjust to always be at full employment. The Great Depression was characterized by high unemployment. Keynes observed that aggregate demand was not always equal to the productive capacity of the economy in the short run. Because of this short-run volatility of aggregate demand, Keynesian economists advocate for government intervention to keep the economy stable.
Answer and Explanation: 1
Keynes explained the inflationary gap as an excess to the expected future consumption. A certain amount of goods and services are planned and produced...
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fromChapter 13 / Lesson 15
An expansionary gap occurs when an economy is operating above its long-run potential. Learn about the definition of expansionary gap and the consequence of rapid economic output, and visualize the concept with illustrations of full employment and expansionary gap.