What is inflationary and deflationary gaps?
Meaning. The excess of aggregate demand above the level that is required to maintain full employment level of equilibrium is termed as inflationary gap. The shortfall of aggregate demand below the level that is required to maintain full employment level of equilibrium is termed as a deflationary gap.
What do you mean by inflationary gap?
An inflationary gap is a macroeconomic concept that measures the difference between the current level of real gross domestic product (GDP) and the GDP that would exist if an economy was operating at full employment.
What is inflationary gap Class 12?
Inflationary gap is the difference between the actual aggregate demand and the aggregate supply in a market with maximum level of employment. On the other hand, a deflationary gap is an amount by which aggregate supply exceeds aggregate demand.
What is the difference between inflation and inflationary gap?
Inflationary gap is the amount by which the actual aggregate demand exceeds ‘aggregate supply at level of full employment’. It is a measure of the excess of aggregate demand over level of output at full employment. Inflationary gap causes a rise in price level which is called inflation.
What is difference between inflationary gap and deflationary gap explain both of them diagrammatically?
Inflationary gap is the amount by which the actual aggregate demand exceeds aggregate supply at the level of full employment. Deflationary gap is the amount by which the actual aggregate demand falls short of aggregate supply at the level of full employment (i.e., falls short of full employment output).
What is inflationary gap Upsc?
Inflationary Gap: the Inflationary gap is a situation which arises when Aggregate demand in an economy exceeds the Aggregate supply at the full employment level. In such a situation, the excessive pressure on demand will fuel the inflation in the economy.
What are the causes of deflationary gap?
Causes of Deflation
- Fall in the money supply. A central bank.
- Decline in confidence. Negative events in the economy, such as recession, may also cause a fall in aggregate demand.
- Lower production costs.
- Technological advances.
- Increase in unemployment.
- Increase in the real value of debt.
- Deflation spiral.
What is inflationary gap explain with diagram?
Inflationary gap is thus the result of excess demand. It may be defined as the excess of planned levels of expenditure over the available output at base prices. An example will help us to clear the meaning of the concept of inflationary gap. Suppose, the aggregate value of output at current price is Rs.
What is inflationary gap with diagram?
How is deflationary gap measured?
Deflationary gap is the amount by which actual aggregate demand falls short of aggregate supply at level of full employment’. It is a measure of amount of deficiency of aggregate demand. Deflationary gap causes a decline in output, income and employment along with persistent fall in prices.
How to eliminate inflationary gap?
Inflationary gap can be eliminated/ minimized by using monetary policy and or fiscal policy instruments. Under the monetary policy, money supply is reduced and/or interest rates are increased. This gap, however, can be reduced either by reducing money income through reduction in government expenditure, or by increasing output of goods and services, or by increasing taxes.
What are the causes of inflationary gap?
Inflationary gaps occur when aggregate demand is higher than the projected demand, which can be caused by two different things: A rise in aggregate demand. A rise in demand will naturally create a discrepancy between real demand and potential demand.
What are the consequences of an inflationary gap?
The consequence of such gap is price rise. Prices continue to rise so long as this gap persists. Inflationary gap thus describes disequilibrium situation. Inflationary gap is thus the result of excess demand. It may be defined as the excess of planned levels of expenditure over the available output at base prices.
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.
