Question

Explain what is meant by a recessionary gap and a inflationary gap.

Answer 1

A recessionary gap means when the economy is producing less than its potential or below its full employment equilibrium. This is the situation happens during phase of business activity contraction which results in lower demand for labor while supply is there for labor resulting in downward pressure on wages which reduces income levels resulting in low consumption and the economy enters into vicious cycle.

A inflationary gap is opposite of a recessionary gap, in a inflationary gap the economy operates above full employment equilibrium which means demand is higher for labor then supply because of growth or expansion in the business cycle resulting in rise in wages which causes prices to go up and inflation goes up.

the above is answer..