Can inflationary gap exist at equilibrium level of income?
Answers
Due the inability of the economy to fulfil this increased demand, the average price level in the economy increases, resulting in inflation.
The government can use contractionary fiscal policy to control inflation and narrow the gap.
Deflationary gap is the difference between potential output at full level of employment and the actual level of output of the economy.
For deflationary gap all the resources of the economy are not being used to the optimum level and some are idle. This comes with unemployment and low levels of output. In order to reduce/eliminate the deflationary gap, the government uses expansionary fiscal policy.
hope it helps you friend.
@ sk
Inflationary gap is when the aggregate demand exceeds the productive potential of the economy.
Due the inability of the economy to fulfil this increased demand, the average price level in the economy increases, resulting in inflation.
The government can use contractionary fiscal policy to control inflation and narrow the gap.
Deflationary gap is the difference between potential output at full level of employment and the actual level of output of the economy.
For deflationary gap all the resources of the economy are not being used to the optimum level and some are idle. This comes with unemployment and low levels of output. In order to reduce/eliminate the deflationary gap, the government uses expansionary fiscal policy.
hope it helps you friend.
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