Chapter 23, Problem 1DAP

To determine

(a) To determine:

The average inflation gap of the recent four quarters taking inflation target of 2%. Also, know the average of these inflation gaps.

Introduction:

Inflation gap refers to the gap between the current rate of inflation and inflation targeted. It can be represented by the formula given below:

Inflation Gap = Current inflation - Target inflation

To determine

(b) To determine:

The output gap and the average output gap using the real gross domestic product (Real GDP) and potential gross domestic product (Potential GDP) data of recent four quarters.

Introduction:

Output gap refers to the total amount by which the real output of an economy falls short from the potential level of output or the potential GDP. It can be represented by the formula given below:

Output Gap = Real GDP − Potential GDP

To determine

(c) To determine:

The average unemployment gap of recent 12 months, with 5.6% as the natural unemployment rate and check if device coincidence applies to this economic situation.

Introduction:

Unemployment Gap refers to the difference between the unemployment rate and natural rate of unemployment in an economy. It can be given by the formula:

Unemployment Gap = Unemployment Rate − Natural rate of Unemployment

Divine coincidence is a new Keynesian property which exhibits that there should be no trade off between stabilization of inflation level and the stabilization of output level in an economy.