Give an e.g to show difference between excess demand and Inflationary gap
Dear Student,
Excess demand is very different from inflationary gap. In fact, it is the excess demand that leads to inflationary gap. To be specific, excess demand is the cause and inflationary gap is the effect.
Excess demand implies a situation where the actual aggregate demand for output (AD E ) is above the full employment level of output (AD F ).In simple words, it can be described as a situation, where economy is demanding greater units of output than what can be produced by fully employing all the available resources. Symbolically, excess demand can be described by the following inequality:
ADE > ADF ⇒ Situation of Excess Demand
In a situation of excess demand, as the production cannot be increased beyond the full employment level of output (where all the resources are fully utilised) but because of excess demand price tends to rise (due to shortage of supply). As a result, inflationary gap emerges. This gap is the difference between the actual aggregate demand and the full employment level. Algebraically, inflationary gap is expressed as:
ADE – ADF ⇒ Inflationary Gap.
Regards!
Excess demand is very different from inflationary gap. In fact, it is the excess demand that leads to inflationary gap. To be specific, excess demand is the cause and inflationary gap is the effect.
Excess demand implies a situation where the actual aggregate demand for output (AD E ) is above the full employment level of output (AD F ).In simple words, it can be described as a situation, where economy is demanding greater units of output than what can be produced by fully employing all the available resources. Symbolically, excess demand can be described by the following inequality:
ADE > ADF ⇒ Situation of Excess Demand
In a situation of excess demand, as the production cannot be increased beyond the full employment level of output (where all the resources are fully utilised) but because of excess demand price tends to rise (due to shortage of supply). As a result, inflationary gap emerges. This gap is the difference between the actual aggregate demand and the full employment level. Algebraically, inflationary gap is expressed as:
ADE – ADF ⇒ Inflationary Gap.
Regards!