Question

what is deflationary gap??
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Answer 1

Answer:

Definition deflationary gap – This is the difference between the full employment level of output and actual output. For example, in a recession, the deflationary gap may be quite substantial, indicative of the high rates of unemployment and underused resources. A deflationary gap is also known as a negative output gap.

Causes of deflationary gap

Fall in aggregate demand (AD) due to

Fall in exports (global recession)

Fall in investment (due to banking collapse and credit crunch)

Fall in consumer spending (e.g. higher interest rates, falling wages.)

Economic growth well below the average trend rate of growth (AD increasing at slower rate than productive capacity)

Answer 2

Explanation:

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.

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