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- Title
THE INFLATIONARY GAP.
- Authors
Salant, Walter S.
- Abstract
The article focuses on the concept of "inflationary gap" created by the present war, and the ways to measure it. This gap has been defined as the reflection of the enormous wartime increase in government spending and the resulting danger of serious inflation. This concept is most often used in connection with tax policy, specifically in calculations of what amounts of additional taxation are required to prevent inflation. All procedures involve a comparison of estimates of the potential real output of goods and services with estimated demand, based upon assumed levels of defense expenditures. Another procedure has been mentioned which compares the expansion of real output with the increase in defense expenditures and obtains as a difference the necessary reduction of civilian output. It then estimates the independent change in demand for civilian output that will occur if no new anti-inflationary measures are adopted. The estimated changes in the propensity to consume and in capital formation are then added to give the total estimated change in private demand for civilian goods. This change in demand is then compared with the necessary change in civilian output. The difference is the amount of reduction in civilian demand that must be brought about by new measures of policy. In computing the severity of the measures required to eliminate this gap, it is of course necessary to take into account their secondary effects. It is also necessary to consider what steps are required to fulfill the assumption on which the estimates of change in demand were based.
- Subjects
UNITED States; PRICE inflation; ECONOMIC policy; ECONOMICS of war; UNITED States economy; FISCAL policy; NATIONAL security finance; ECONOMIC demand
- Publication
American Economic Review, 1942, Vol 32, Issue 2, p308
- ISSN
0002-8282
- Publication type
Article