question_answer

Distinguish between inflationary gap and deflationary gap. Name two measures by which these can be corrected.

Answer:

            Difference between inflationary gap and deflationary gap are:

Basis	Inflationary Gap	Deflationary Gap
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 short fall of aggregate demand below the level that is required to maintain full employment level of equilibrium is termed as deflationary gap.
Effect on price level	Inflationary gap causes inflation and increases wages and price level in the economy.	Deflationary gap causes deflation and decreases wages and price level in the economy.
Level of output	Level of output is constant at full employment.	Level of output is less than that at full employment.
Level of employment	There is no unemployment or underemployment in the economy.	There is unemployment or underemployment in the economy.

Two measures by which inflationary gap can be corrected: (i) Increase in bank rate                (ii) Increase in repo rate                          Two measures by which deflationary gap can be corrected: (i) Decrease in bank rate               (ii) Decrease in repo rate