Table of Contents
- 1 How is a deflationary gap created?
- 2 How do you close inflationary and deflationary gap?
- 3 What is deflationary gap explain with the help of diagram?
- 4 What do you mean by deflationary gap discuss any two fiscal measures to correct the situation of deflationary gap?
- 5 What are the main causes of deflation?
How is a deflationary gap created?
A deflationary gap occurs when the actual real GDP is below its potential output. In this situation, some economic resources are underutilized, which in turn, creating a downward pressure on price level. This term is synonymous with the recessionary gap or the Okun gap.
How do you calculate inflationary gap?
Inflationary Gap = Real or Actual GDP – Anticipated GDP While the inflationary gap is one, the recessionary gap is the other. An inflationary gap can be understood as the measure of excess aggregate demand over aggregate potential demand during full employment.
What is deflationary gap?
Definition of deflationary gap : a deficit in total disposable income relative to the current value of goods produced that is sufficient to cause a decline in prices and a lowering of production — compare inflationary gap.
How do you close inflationary and deflationary gap?
Fiscal policies are policies enacted by the government to control the money supply. To manage inflationary gaps, governments can enact contractionary fiscal policies, which reduce the money supply and therefore reduce demand. These policies can include reducing government spending and increasing taxes.
What is deflationary gap with diagram?
The distance between the 45° line and the AD line at the full employment output situation is referred as the deflationary gap. It is AB in Fig. 11.7. Since aggregate demand is less than the country’s potential output, the economy suffers from unemployment of labour and other resources.
How do you calculate output gap?
Determining the output gap is a simple calculation of dividing the difference between the actual and potential GDP by the potential GDP. Because potential output isn’t observable, it’s often determined using historical data.
What is deflationary gap explain with the help of diagram?
Deflationary Gap refers to Aggregate Demand falling short of Aggregate Supply at the full employment level of income. It is called deflationary because it brings in deflationary tendencies. ADFE = Aggregate Demand at full employment level: ADIU= AD at involuntary unemployment level.
What are differences between inflationary gap and deflationary gap?
Inflationary Gap- When Aggregate Demand is greater than Aggregate Supply at full employment level it is a situation of Inflationary Gap. Deflationary Gap- When Aggregate Demand is less than Aggregate Supply at full employment level. Thus the Aggregate Demand increases and ultimately the economy attains equilibrium.
Can deflationary gap exist at equilibrium level of income explain?
Yes, deflationary gap can exist at equilibrium level of income. In the below figure equilibrium is attained at a equilibrium point E,, when deflationary gap is EB. Answer: Inflationary gap is the gap showing excess of current aggregate demand over ‘aggregate supply at the level of full employment’.
What do you mean by deflationary gap discuss any two fiscal measures to correct the situation of deflationary gap?
Increases in government expenditure : If the government expenditure is increased by an amount equal to the deflationary gap it will restore the economy to the full employment equilibrium. Reduction in the amount of taxes: The government can give tax concession to leave more disposable income in the hands of people.
Deflationary gap is the difference between full level of employment and the actual level of output of the economy. We can see in the diagram below, that the economy is operating a level ‘a’ below the Yf (full level of employment).
Why is there an inflationary gap at full employment?
In other words, because of full employment, output cannot increase to Y*. Thus at Y f level of full employment output, there occurs an inflationary gap to the extent of AB. The vertical distance between the aggregate demand and the 45° line at the full employment level of national income is termed the inflationary gap.
What is the deflationary gap in the UK economy post 2008/09 recession?
The deflationary gap would be at point D. The deflationary gap is also influenced by the rate of economic growth compared to the long-run trend rate of growth. If growth is below trend we will get a deflationary gap. The deflationary gap in the UK economy post 2008/09 recession.
What are the main causes of deflation?
Causes of deflationary gap. Fall in aggregate demand (AD) due to Fall in exports (global recession) Fall in investment (due to banking collapse and credit crunch) Fall in consumer spending (e.g. higher interest rates, falling wages.)