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What is inflationary gap? Explain the role of Cash Reserve Ratio in removing this gap.

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An inflationary gap is a macroeconomic concept that describes the difference between the current level of real gross domestic product (GDP) and the anticipated GDP that would be experienced if an economy is at full employment. This is also referred to as the potential GDP. To correct the problem of inflationary gap, the Central Bank increases the Cash Reserve Ratio. It reduces the supply of money and credit creation capabilities of commercial banks. Due to lesser supply of money, the Aggregate Demand comes down and the economy attains equilibrium situation

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