Recall that the basic thrust of Keynesian economics as discussed earlier is to demonstrate that, in a capitalistic system, the economy can achieve equilibrium at any point within the system. This means that one can talk about full employment equilibrium, less than full employment equilibrium, more than full employment equilibrium. These ideas can be analyzed in terms of two basic concepts: the inflationary and deflationary gaps. Let us defined and graphically illustrate each of these terms.
The inflationary gap is the amount by which aggregate demand exceeds aggregate supply at full employment(Yf*). It is often characterized by an increase in general price levels and constant real output. This gap can be removed by policies that move AD down to e0 as shown in panel (b). We shall consider such policies in subsequent chapters.
450
0 Y1 NNP
Full investment
AD C.I AS
Case of full employment
(b)
Self Assessment Exercise
i. Graphically explain the inflationary gap ii. What factor could necessitate inflationary gap 3.3 Deflationary Gap
The deflationary gap measures the amount by which aggregate demand falls short of aggregate supply at the full employment equilibrium position (Yf*). This gap is sometimes called a recessionary gap and is shown in panel (c) of Fig. 4.3b.
It is often characterized by declining prices, unemployment and increased accumulation of inventory. To remove this gap, the policy thrust would be to shift AD up to e2.
It should be noted that the concepts of inflationary and deflationary gaps are rather extreme and simplistic ways of depicting inflationary and deflationary phenomena. In real life economy, things are much more complex. The notions are useful, however, as benchmarks for policy analysis of deviation from the full employment norm. in subsequent chapters we shall analyse the monetary and fiscal tools for dealing with these problems.
Inflationary gaps fig. 4.3.1(b)
450
0 Y1 NNP
AD1
C.I AS Case of full employment
AD0
Y1
Inflationary gap e0
Deflationary gaps fig. 4.3.1(c) Self Assessment Exercise
i. Graphically explain the inflationary gap
ii. What factor could responsible for the inflationary gap 4.0 Conclusion
This unit concludes that every economy is faced with different level of equilibrium which could result to any of the aforementioned gaps but could also be resolve through application of macroeconomic tools.
5.0 Summary
This unit looked at the concept of full employment equilibrium amidst inflationary and deflationary gaps. The unit further explained through graphical illustration the process that the two gaps (i.e. inflationary and deflationary gap) involves in a clear cut terms.
6.0 Tutor-Marked Assignment
i. Graphically, explain the concept of full employment equilibrium.
ii. Explain in a clear term perhaps with graphical illustration what is meant by inflationary and deflationary gaps.
iii. Differentiate between full employment equilibrium, inflationary and deflationary gaps.
iv. Discuss the factor that could bring about situation of both inflationary and deflationary gaps
v. Examine inflationary and deflationary gaps in the light of macroeconomic imbalances
450
0 Y0 NNP
AD C.I AS
Case of full employment
AD1
Y1
deflationary gap
e2
deflationary gap
7.0 References/Further Readings
Attah B.O, Bakare Aremu, T.A. & Daisi, O.R., (2011); Anatomy of Economics Principles, Q&A (Macroeconomics), Raamson Printing Press, Oke-Afa, Isolo, Lagos, Nigeria
Amacher, R and Ulbrich, H, (1986); Principles of Economics, South Western Publications Co. Cincinnafi, Oliso
Bakare –Aremu T.A, (2013); Fundamental of Economics Principles (Macroeconomics), Raamson Printing Press, Oke-Afa, Isolo, Lagos, Nigeria
Bakare I.A.O, Daisi, O.R., Jenrola, O.A., & Okunnu, M.A., (1999): Principles and Practice of Economics (Macro Approach), Raamson Printing Press, Mushin, Lagos, NigeriaDennis R. A. et-al; International Economics, Mcgraw Hill Irwin, 8th edition.
Familoni K.A, (1990); Development in Macroeconomics Policy, Concept Publications, Lagos, Nigeria
Fashina E.O, (2000); Foundations of Economics Analysis (Macro Theories), F.E.F International Company, Ikeja, Lagos, Nigeria
Jhingan M.L, (2010); Macroeconomics Theory, 12th edition, Vrinda Publications (P) Ltd. Delhi, India
Jhingan M.L, (2010); International Economics, Vrinda Publications (P) Ltd.
Delhi, India
Lipsey R.G, (1979); An Introduction to Positive Economics, Hayper & Raw, London
Umo J.U, (1986); Economics; An African Perspectives , Johnwest, Lagos Nigeria.
Gordon Robert J. (2009). Macroeconomics (Eleventh ed.). Boston: Pearson Addison Wesley. ISBN 9780321552075
MODULE FIVE
Unit 1: Money and Barter System Unit 2: Evolution and Nature of money Unit 3: Demand and Supply of Money
Unit4: Commercial Bank and Money Creation UNIT 1: MONEY AND BARTER SYSTEM CONTENTS
1.0 Introduction 2.0 Objectives 3.0 Main Content
3.1 Conceptual Definition of Money 3.2 The Barter System
3.3 Barter Vs Counter Trade
3.4 Features and Functions of Money 4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment 7.0 References/Further Readings 1.0 Introduction
This unit introduces the learner to concept of money, its evolution through barter system, it also discuss the problem encountered by the barter system which lead to the evolution of money. Moreover, this unit looks at the relationship between barter systems and counter trade. It equally explained the uses of money as a medium of exchange and discusses its characteristics and functions. The functions perform by modern money cum its qualities offset the problems encountered during the barter systems.
2.0 Objectives
At the end of this unit, you should be able to i) Define money and barter system.
ii) Discuss the problem encountered in the barter system
iii) Explain the relationship if any between barter system and counter trade.
iv) Discuss the features and functions of money