Inflationary Gap

The inflationary gap is the difference between the actual inflation rate and the target inflation rate. It is a measure of how much inflation is above or below the desired level.

The target inflation rate is the rate of inflation that the central bank is trying to achieve. The central bank uses monetary policy to try to keep inflation close to the target rate.

If the actual inflation rate is above the target rate, then there is an inflationary gap. This means that the central bank is not doing a good job of controlling inflation.

The central bank can try to close the inflationary gap by raising interest rates. This will make it more expensive for businesses to borrow money, which will slow down economic growth and reduce inflation.

However, raising interest rates can also have negative consequences, such as causing unemployment to rise. Therefore, the central bank must carefully consider the costs and benefits of raising interest rates before taking action.

The inflationary gap is an important concept in macroeconomics. It is a measure of how well the central bank is doing its job of controlling inflation.