11
Question
Discuss, in brief, the meanings of deficient demand and deflationary gap with the help of a diagram. Also, discuss the effect of deficient demand on output, employment and price level.
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Solution
In the diagram AB represents the deflationary gap or deficient demand.Deficient demand refers to the situation when aggregate demand is short
of aggregate supply corresponding to full employment level in the
economy. Aggregate supply being perfectly elastic, it converges with
aggregate demand at a lower level of output lower than the full
employment level of output in the economy. This is a situation of
underemployment equilibrium.
Deficient demand refers to the situation when aggregate demand is short
of aggregate supply corresponding to full employment level in the
economy. Aggregate supply being perfectly elastic, it converges with
aggregate demand at a lower level of output lower than the full
employment level of output in the economy. This is a situation of
underemployment equilibrium.
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