Consequences of an inflationary gap

The inflationary gap occurs when the relative rise in real GDP causes an economy to increase its consumption, leading prices to climb in the long run.

Positive consequences include:

• Stimulates investment
• Increases tax revenue
• Higher wages
• Increases producer’s profit margin
• Stimulates hard work leading to increased output

Negative consequences include

• Increased cost of production
• Increased prices of commodities
• Lower standards of living
• Discourages saving
• Distorts government planning
• Encourages speculative activities hence discouraging consumption
• Cause industrial unrest
• Encourages dumping