Recessionary gap and an inflationary gap
How can the 3 major tools of monetary policy correct a recessionary gap and an inflationary gap?© SolutionLibrary Inc. solutionlibary.com 9836dcf9d7 https://solutionlibrary.com/economics/applied-economics/recessionary-gap-and-an-inflationary-gap-2g8
...than full-employment real production. A recessionary gap, also termed a contractionary gap, is associated with a business-cycle contraction.
2. INFLATIONARY GAP: The difference between the equilibrium real production achieved in the short-run aggregate market and full-employment real production. This occurs when short-run equilibrium real production is MORE than full-employment real production. An inflationary gap, also termed an expansionary gap, is associated with a business-cycle expansion, especially the latter stages of an expansion.
Obviously, during a business-cycle contraction, the central bank should apply expansionary monetary policies (an increase in the amount of money in circulation) to correct for a recessionary gap. The central bank buys government securities. Then there's more money in circulation. It can also push down the discount rate, ...