Question

Explain the concept of inflationary gap with the help of a diagram. Discuss two monetary measures to correct it.

Answer 1

Inflationary gap or excess demand occurs when AD > AS corresponding to full employment level. This inflationary gap, i.e., excess of aggregate demand causes inflation in the economy and price levels tend to rise.Measures to correct inflationary gap are:

(i) Rise in bank rate (ii) Sale of securities in open market