Question

The formula for deflationary gap is

• A. Potential GDP - Actual GDP
• B. Potential GDP + Actual GDP
• C. Both (A) and (B)
• D. None of these

Hint:

Gap = Potential - Actual. If the result is positive, it's a deflationary gap. If it's negative, it's an inflationary gap.

Answer 1

The Correct Option is A

A deflationary gap (or a recessionary gap) occurs when an economy's actual output (Actual GDP) is below its potential output at full employment (Potential GDP). The gap is the measure of this shortfall. Therefore, the formula is the difference between the potential level and the actual level. \[ \text{Deflationary Gap} = \text{Potential GDP} - \text{Actual GDP} \] An inflationary gap, conversely, occurs when Actual GDP exceeds Potential GDP.