12-18-2004, 10:53 PM
salamz,
yaar to show a deflationary gap grphically u can plot "Real National Income" along the x-axis and "Price" levels along the "y-axis".
Aggregate Supply(A.S) is an upward sloping curve upto the "labour constraint" from where it becomes a vertical straight line. The Aggregate Demand(A.D) is a downward sloping curve.
when the A.D intersects with A.S at the point where the A.S becomes vertical, the state is know as full employment with zero inflation.
when the A.D intersects with the A.S at a point beyond the labour contraint we are working at full employment but the price levels are inflated. the gap b/w the prices now and the prices when we were working at full employment with zero inflation is the "inflationary gap". I think that the %age difference between these price levels should be taken as a measure of inflationary gap, however i am not sure about how to measure inflationary gap quantatively.
The graph i am refering to is in PBP study text.
opposite is the case with deflationary gap.
I would appreciate if anybody could elaborate more on this.
Regards,
Ice Blue
yaar to show a deflationary gap grphically u can plot "Real National Income" along the x-axis and "Price" levels along the "y-axis".
Aggregate Supply(A.S) is an upward sloping curve upto the "labour constraint" from where it becomes a vertical straight line. The Aggregate Demand(A.D) is a downward sloping curve.
when the A.D intersects with A.S at the point where the A.S becomes vertical, the state is know as full employment with zero inflation.
when the A.D intersects with the A.S at a point beyond the labour contraint we are working at full employment but the price levels are inflated. the gap b/w the prices now and the prices when we were working at full employment with zero inflation is the "inflationary gap". I think that the %age difference between these price levels should be taken as a measure of inflationary gap, however i am not sure about how to measure inflationary gap quantatively.
The graph i am refering to is in PBP study text.
opposite is the case with deflationary gap.
I would appreciate if anybody could elaborate more on this.
Regards,
Ice Blue
