Question

does the FED have the vital information to measure output gap?

Answer 1

The output gap in economics measure the difference between the actual output and the potential output. hair potential output is the maximum amount of goods and services that an economy can turn out when it is most efficient that is with full production capacity.

we can also see a potential output is referred to as the production capacity of an economy.

In theory, this output gap can play a central role in the monetary policy deliberations and strategy.

Federal reserve has to maintain full employment which corresponds to an output gap of zero.

Is this output gap can also lead to inflation.

Positive output gap implies overheating economy and ultimately inflation whereas negative output gap implies slack economy will be ultimately putting the downward pressure on inflation.

Measuring this output gap accurately is very difficult as the data is subjected to revision and estimates of potential output a wall as more data become available.

For example during 1970 the Fed believed the output gap to be much more negative but it was not actually that negative during that time duration. Does the policy makers had to take action that overheated the economy and contributed to the inflationary search.

So we can conclude with the comment that getting accurate data is a big challenge and nearly impossible.