The significance of the concept of inflationary gap is discussed below.
1. Effect on Income and Prices:
The significance of inflationary gap depends on its effect on the national income and prices. When inflationary gap exists at full employment, it increases money income of the people, but output cannot be increased because of full employment. Therefore, inflationary gap directly leads to the rise in prices.
2. Non-Monetary Inflation:
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Keynes’ emphasis on the flow of expenditures (C + I + G) as the cause of demand pull inflation leads to the conclusion that a society can have non-monetary inflation. This is quite opposite to the view held by the quantity theorists who believed that inflation is due to the excessive growth of money stock.
In Keynes’ analysis, the effect of this excessive growth of money supply may be uncertain because it will cause inflationary rise in prices indirectly through its effect first on rate of interest and, in turn, on aggregate spending.
3. Anti-Inflationary Policies:
Inflationary gap guides the monetary and fiscal authorities to adopt appropriate anti- inflationary measures to control inflationary pressures. These measures aim at affecting the propensities to consume, to save, and to invest, which together determine the general price level.