Explain what economists mean by an inflationary gap and discuss why this is considered to be an economic problem. Use a diagram(s) to support your answer.

Mark scheme

Marking points from the official mark scheme (May/June 2020). The mark or mark type is shown in brackets.

1. [12] A clear definition of the meaning of the term 'inflationary gap' will be supported by an accurate, clearly labelled supporting diagram which identifies the inflationary gap. Some attempt should then be made to consider why this might cause economic problems. References might be made to the negative effect on expectations, private investment, the exchange rates, savers and debtors plus any other relevant effects.
2. [9-12] For an answer that explains the meaning of an inflationary gap and which refers to at least three potential negative effects. The relative importance of each identified effect should be considered.
3. [7-8] For an answer that identifies at least two negative effects associated with an inflationary gap and considers their relative importance or analyses three potential impacts on the economy associated with an inflationary gap.
4. [5-6] For an answer that describes what is meant by an inflationary gap and supports this with a reasonably accurate diagram and some brief comment regarding potential negative effects on the economy.
5. [1-4] For an answer that has some basic correct facts but includes irrelevancies and errors of theory.
6. [13] Responses should indicate a clear understanding of what is meant by monetary policy and alternative methods of monetary control should be explained. References should then be made to the problems associated with an inflationary gap and an attempt made to discuss the effectiveness of alternative monetary policies used to reduce an inflationary gap. The effectiveness of these policies should be evaluated and compared with alternative fiscal/supply side policies.
7. [9-13] For a detailed explanation of why monetary policies might solve problems associated with an inflationary gap. At least two types of monetary policy should be considered. Alternative policy measures should then be explained and discussed. A conclusion should then consider the relative effectiveness of monetary policy options compared to fiscal/supply side alternatives.
8. [7-8] For analysis of how monetary policy might work in order to reduce an inflationary gap. A clear diagram will be provided and problems associated with an inflationary gap will be identified. Only a brief comment will be provided regarding alternative policy approaches.
9. [5-6] For an answer that focuses upon explaining what is meant by an inflationary gap and describes alternative monetary policy options but does not discuss the effectiveness of either monetary policy or alternative policy options.
10. [1-4] For an answer that has some basic correct facts but includes irrelevancies and errors of theory.