a) Average inflation gap b) Average output gap c) Average unemployment gap Concept Introduction: Inflation Gap: It is the difference between the actual level of real GDP and the potential GDP, which is the anticipated GDP if the economy at full employment. Output Gap: It is the difference between the actual level of output produced by an economy and its potential output, which is the maximum amount of goods and services that the economy can produce when it is running in full capacity. Unemployment Gap: It is the difference between the actual level of unemployment and the natural rate of unemployment. Divine Coincidence: Olivier Blanchard and Jordi Galí in 2005 defined the concept of divine coincidence. It means that there is no trade-off between the stabilization of inflation and the stabilization of the output gap for central banks. It signifies the absence of real imperfections like real wage rigidities. It implies that the output gap can be brought to zero by controlling inflation, and there is no need to have separate targets for both.

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Chapter 24, Problem 1DAP

To determine

To Calculate:

a) Average inflation gap

b) Average output gap

c) Average unemployment gap

Concept Introduction:

Inflation Gap: It is the difference between the actual level of real GDP and the potential GDP, which is the anticipated GDP if the economy at full employment.

Output Gap: It is the difference between the actual level of output produced by an economy and its potential output, which is the maximum amount of goods and services that the economy can produce when it is running in full capacity.

Unemployment Gap: It is the difference between the actual level of unemployment and the natural rate of unemployment.

Divine Coincidence: Olivier Blanchard and Jordi Galí in 2005 defined the concept of divine coincidence. It means that there is no trade-off between the stabilization of inflation and the stabilization of the output gap for central banks. It signifies the absence of real imperfections like real wage rigidities. It implies that the output gap can be brought to zero by controlling inflation, and there is no need to have separate targets for both.

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