Question

What is meant by inflationary gap? State three measures to reduce this gap.

Answer 1

Inflationary gap is the difference between the current level of real GDP and the anticipated GDP if the economy was at its full capacity (i.e full employment). The following could be done to reduce inflation gap:

1) Reduce government spending

2) Increase direct/indirect taxes

3) Central bank can also increase interest rates which will dampen lending and hence dampen investment