Inflation Targeting, Interest-Rate Policy and Outputs Gaps

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  • Created by: Ben
  • Created on: 12-05-13 10:27

Output Gaps

Output gap compares actual output with potential/non-inflationary output.

It is assumed that inflation is demand led and that demand is affected by interest rates.

When there is growth above the trend line we have an output gap of overstretched capacity, where inflation is likely due to supply bottlenecks.We can expect intrest rates to increase.

Where growth is below


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