Market Monetarists prefer to tackle the question of “gap” from the nominal or spending perspective. After all, that´s what stabilization policy can influence or control. So I present the chart below with three “ingredients”:
- Actual nominal spending (NGDP)
- A linear trend from 1987 to 2005
- The CBO “Potential NGDP”
There are a few “descriptions” in the chart, so you can make up your own story. But the “bottom line” is that there is a “spending gap”. It may be “high” or “low”, or somewhere in between so monetary policy is “shy”.