Question

The gap by which actual aggregate demand exceeds the aggregate supply required to establish full employment equilibrium is known as ______.

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

Answer 1

The correct option is C Inflationary Gap

Inflationary gap is the excess of aggregate demand over and above the 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.