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Chapter 24: Q.1 (page 655)

What does it mean when we say that the inflation gap is negative?

Short Answer

Expert verified

The inflation gap is negative when the present rate of inflation is a smaller amount than the target rate of inflation in an economy.

Step by step solution

01

Concept Introduction 

Inflation is the continuous increase in the prices associated with goods and services within an economy during a specific period of your time.

02

Explanation of Solution 

The inflation gap is negative when the present rate of inflation is a smaller amount than the target rate of inflation in an economy. Inflation is claimed to be negative when the full increase within the prices of commodities are but the expected rise.

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Most popular questions from this chapter

鈥淚f autonomous spending falls, the central bank should lower its inflation target in order to stabilize inflation.鈥� Is this statement true, false, or uncertain? Explain your answer

Go to the St. Louis Federal Reserve FRED database, and find data on the personal consumption expenditure price index (PCECTPI), the unemployment rate (UNRATE), and an estimate of the natural rate of unemployment (NROU). For the price index, adjust the units setting to 鈥淧ercent Change From Year Ago.鈥� For the unemployment rate, adjust the frequency setting to 鈥淨uarterly.鈥� Select the data from 2000through the most current data available, download the data, and plot all three variables on the same graph. Using your graph, identify periods of demand-pull or costpush movements in the inflation rate. Briefly explain your reasoning.

Is stabilization policy more likely to be conducted through monetary policy or through fiscal policy? Why?

If an economy鈥檚 self-correcting mechanism works slowly, should the government necessarily pursue an activist policy to eliminate unemployment? Why or why not?

Suppose the current administration decides to decrease government expenditures as a means of cutting the existing government budget deficit.

  1. Using a graph of aggregate demand and supply, show the effects of such a decision on the economy in the short run. Describe the effects on inflation and output.
  2. What will be the effect on the real interest rate, the inflation rate, and the output level if the Federal Reserve decides to stabilize the inflation rate?
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