Question

In January 2020, the Bank of Canada released its Monetary Policy Report and reported that its latest measures of the output gap (the difference between actual output and the maximum potential output) indicated a small amount of economic slack. What type of output gap does this refer to? For this type of output gap what do you think would be happening to the following macroeconomic variables: (1) the unemployment rate, (2) wages and (3) the inflation rate? In the last six months, what changes do you think have occurred to the output gap?

Answer 1

There is difference between actual and output and potential output which will result in inflationary gap in the economy.

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1) Unemployment rate must be falling because output is rising about natural level.

2) To hire labor above natural level of output, wage rate must be rising becuause there must be shortage of labor and employer must be giving many additional perks and benefits to labor to join them.

3) Inflation rate must be rising because there must be increase in willingness in pay to pay by consumers in society.

This output gap must have been falling from last six months because of COVID-19. Many businesses are temporarily shut which result in less output being produced.