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Chapter 24: Q.1 (page 655)

What does it mean when we say that the inflation gap is negative?

Short Answer

Expert verified

The inflation gap is negative when the present rate of inflation is a smaller amount than the target rate of inflation in an economy.

Step by step solution

01

Concept Introduction 

Inflation is the continuous increase in the prices associated with goods and services within an economy during a specific period of your time.

02

Explanation of Solution 

The inflation gap is negative when the present rate of inflation is a smaller amount than the target rate of inflation in an economy. Inflation is claimed to be negative when the full increase within the prices of commodities are but the expected rise.

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Most popular questions from this chapter

As monetary policymakers become more concerned with inflation stabilization, the slope of the aggregate demand curve becomes flatter. How does the resulting change in the slope of the aggregate demand curve help stabilize inflation when the economy is hit with a temporary negative supply shock? How does this affect output? Use a graph of aggregate demand and supply to demonstrate.

How can monetary authorities target any inflation rate they wish?

Suppose three economies are hit with the same temporary negative supply shock. In country A, inflation initially rises and output falls; then inflation rises more and output increases. In country B, inflation initially rises and output falls; then both inflation and output fall. In country C, inflation initially rises and output falls; then inflation falls and output eventually increases. What type of stabilization approach did each country take?

What will happen if policymakers erroneously believe that the natural rate of unemployment is 7% when it is actually 5% and therefore pursue stabilization policy?

Suppose that f is determined by two factors: financial panic and asset purchases.

  1. Using an MP curve and an AS/AD graph, show how a sufficiently large financial panic can pull the economy below the zero lower bound and into a destabilizing deflationary spiral.
  2. Using an MP curve and an AS/AD graph, show how a sufficient amount of asset purchases can reverse the effects of the financial panic depicted in part (a).
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