Question

______ refers to the situation when aggregate supply falls short of aggregate demand corresponding to full employment level of output in the economy.

• A. Deficient Demand
• B. Excess Demand
• C. Inflationary Gap
• D. Deflationary gap

Answer 1

The correct option is C Inflationary Gap

Inflationary gap is the excess of aggregate demand over and above its level required to maintain full employment equilibrium in the economy. It implies two things-

1) Planned aggregate demand in the economy happens to exceed its full employment level.

2) The level of aggregate demand surpasses the level of aggregate supply even when the available factors are fully utilized.