question_answer

What do you understand by inflationary gap? Explain with the help of diagram. Or Explain the situation of deficient demand in an economy with the help of diagram.

Answer:

The extent to which current aggregate demand becomes higher than the aggregate demand required for full employment, is termed as inflationary gap. In the figure given below, full employment equilibrium is struck at point E. If the level of demand increases to\[A{{D}_{1}}\]it is in excess of what is required to maintain full employment. This causes inflation. Inflationary Gap = EF (The difference between AD and\[A{{D}_{1}}\]). Income/Employment Diagram Showing Inflationary Gap The extent to which aggregate demand falls short of aggregate supply to maintain full employment              equilibrium is known as deficient demand. As shown in the diagram, deficient demand occurs when Aggregate Demand (AD) is less than what is required to maintain full employment in the economy. Full employment level of demand is indicated by\[A{{D}_{1}}\]. If demand level happens to be\[A{{D}_{2}}\]the gap between\[A{{D}_{1}}\]and\[A{{D}_{2}}\],equal to ab, represents deficient demand. Diagram Showing Deficient Demand