Question

What role does government expenditure play to control deficient demand in a three-sector economy? Use diagram.

Answer 1

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.

In a three-sector economy, the government must increase its expenditure to increase the aggregate demand, purchasing power, and money supply in an economy which are necessary to combat deficient demand.