Question

The difference between aggregate demand at above full employment and aggregate demand at full employment expresses

• A. Inflammatory gap
• B. Deflationary gap
• C. Both (A) and (B)
• D. None of these

Hint:

Excess demand (above full employment) = Inflationary Gap. Deficient demand (below full employment) = Deflationary Gap.

Answer 1

The Correct Option is A

An inflationary gap exists when the actual level of aggregate demand exceeds the level of aggregate demand required to achieve full employment. This "too much money chasing too few goods" situation puts upward pressure on prices, leading to inflation. A deflationary gap is the opposite, where aggregate demand is below the full employment level.