3. (a) Explain Keynesian theory of inflationary
gap.
(b) How can this gap be wiped out?
(a) Define deflation.
(b) "Inflation is unjust and deflation is
inexpedient.” Justify the statement
giving your own opinion.
Answers
Answer:
INFLATIONARY GAP, KEYNESIAN MODEL: ... An inflationary gap arises in the Keynesian model of the macroeconomy when the equilibrium level of aggregate production exceeds what could be produced at full employment. This represents the condition that arises when the economy is in a business-cycle expansion.
Answer:
a) INFLATIONARY GAP, KEYNESIAN MODEL: ... An inflationary gap arises in the Keynesian model of the macroeconomy when the equilibrium level of aggregate production exceeds what could be produced at full employment. This represents the condition that arises when the economy is in a business-cycle expansion.
b)The inflationary gap can be wiped out by increase in savings so that the aggregate demand is reduced. But this may lead to deflationary tendencies. Another solution is a raise the value of available output to match the disposable income. As aggregate demand increases, businessmen hire more labour to
expand output
a .the action or process of deflating or being deflated
b .As pointed out by Keynes, “Inflation is unjust, deflation is inexpedient. Of the two deflations is worse. ... On the other hand, deflation leads to fall in output, employment and income. Of all the evils in a capitalist society, unemployment leading to poverty is the worst.