Depression-Caused Gaps:
Money Supply and Employment

The depression created by the 2008-09 recession has resulted in a shortfall in the M1 money supply (the "Money Supply Gap") from its "Potential GDP" level -- i.e., the size of the money supply that would characterize the economy functioning at its potential.
Depression-Caused Money Supply Gap
The depression also caused a shortfall in employment (the "Employment Gap"), measured by the unemployment rate:
Depression-Caused Gaps: Money Supply and Employment
Comparability note:
  • Both the unemployment rate and Money Supply Gap are expressed as percents.
  • The Money Supply Gap represents the divergence of the money supply from its Potential GDP level.
  • The Employment Gap represents the unemployment rate's divergence from the NAIRU level of unemployment incorporated in the Congressional Budget Office's measure of Potential GDP.
    (This Employment Gap can also be thought of essentially as "excess unemployment.")
Because the Money Supply Gap tracks the relationship between GDP and Potential GDP, and the Employment Gap tracks unemployment rate, a more rapid decline in the former than in the latter implies a degree of "jobless recovery."

Posted: June 6, 2012
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