Question

Define the terms recessionary gap and inflationary gap. Why do they occur? Please frame your answer within the context of the COVID-19 impact in the economy.

Answer 1

Recessionary gap is a situation when the equilibrium in the market is below the potetial output, at this point the unemployment will be high, the price will be low and there will be less demand in the economy.

Inflationary gap is a situation when the market equilibrium is at a point higher than the potential GDP, the market equilibrium will cause an inflation. less than normal level of unemployment.

Due to Covid 19 there will be a recessionary gap in the market and output will be less than the potential GDP. the unemployment will rise and aggregate demand will be low. We will need more and more government expenditure and expasnionary monetary policy to come out of recession.