Criticism
Friedman criticized the Keynesian inflationary gap on the grounds that gap analysis can be used only under special circumstances like wartime. He stated that the analysis did not improve our knowledge of business cycles to a great extent. Bert Hansen criticized Keynes for limiting his analysis of the gap only to the goods market, leaving out the factor market. According to him, the gap is caused due to excess demand in both the goods and factor market. Another drawback of this model is its static nature, which was criticized by Milton Friedman, Eric Lundberg and other economists. Keynes himself recognised this drawback and introduced time lags concerning receipts and expenditure of income. T.Koopmans introduced the idea of the speed of inflation, stating that the inflationary gap reduces as the speed of inflation falls. Another weakness of the theory is that it is concerned only with flow concepts like current income, expenditure, consumption, and saving. However the increase of prices affects not only current goods but also the stock of goods already out in the market. This point is ignored in the theory.
Despite these criticisms, the concept of inflationary gap has proved to be of much importance in explaining rising prices at full employment level and policy measures in controlling inflation.
Read more about this topic: Inflationary Gap
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