Question

Explain the meaning of inflationary gap and deflationary gap with the help of diagrams.

Answer 1

EF indicates the excess demand or the inflationary gap.

Excess demand or inflationary gap is the excess of aggregate demand over and above its level required to maintain full employment equilibrium in the economy.

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.