Question

5. What is a recessionary expenditure gap? An inflationary expenditure gap? Which is associated with a positive GDP gap? A negative GDP gap? (answer in your own words)

Answer 1

Recessionary Expenditure Gap- It is the amount by which at the full employment GDP level ,the aggregate expenditure is lower than the expenditure needed to achieve the GDP at full employment level.

Inflationary Expenditure Gap- It is the amount wherein at the full employment GDP, the aggregate expenditure outpace the expenditure needed to acquire full employment GDP level.

A GDP gap can be defined as the difference between actual total output and possible total output of an economy. It can be formulated as,

GDP GAP = ACTUAL GDP - POTENTIAL GDP

A positive gap of economy is associated with an expansion. This means full employment is exceeded and there lies demand for more labour. So here exist Inflationary gap whereas in case of negative GDP gap the economy is short with its production with its resources that means economy is not at full employment hence here exist recessionary pressure and leads to negative GDP gap.